I’m a huge weirdo, so I love to do random studies like whether I can eat a whole bowl of ramen (I can), whether 7 hours of sleep really makes a huge difference to productivity (it doesn’t), and whether The Wolverine is the worst X-Men movie ever (the jury is still out on that one).
My latest foray is trying to figure out whether home ownership is actually worth it in Singapore. You know the usual argument: Prices remain high despite cooling measures, Singaporeans are taking on too much housing debt, yadda-yadda. So it got me wondering: Let’s try to challenge the assumption that home ownership is The Ultimate Goal of Life for everyone, and think about when it might actually be more worth it to rent.
I’m not a home owner myself, nor have I done any research on this, so I’m looking for some help.
The genesis of this is this article from James Altucher:
But first, what is the true cost of your house:
OWN = down payment + size of mortgage, + all the interest payments, + all the taxes (which can’t be calculated since taxes will go up in unexpected ways) + all maintenance (which also can’t be calculated) + opportunity cost of time (which is minimal because you love Home Depot and toilets).
RENT = All of your rental payments added up MINUS what you would make buying bonds with the money you would’ve used on a downpayment.
Then compare the two. Which one is more? Don’t do the choice that adds up to more.
You can argue that I should also MINUS what one would make from the rising value of a house. But it’s basically unpredictable and people put that money into buying the next house anyway.
Is this argument valid? Flawed? Completely freakin’ unreasonable?
I’d love to crunch the numbers on this thing. I have no idea where to start though.
I’d love to hear from you if you could supply the figures he mentioned:
- Downpayment
- Size of mortgage
- Interest payments
- Tax payments (let’s assume it won’t go up)
- Maintenance
- Rental for an equivalent property
Alternatively, if you could point me to a resource where I can find figures like these, that’ll be awesome too.
Or even better still, if you’d like to work with me to take a stab at this, send me an email and we can talk.
A caveat: This is a super controversial topic, so I know a couple of people are going to email me with passionate rants about how expensive everything is and/or why renting is the BIGGEST MISTAKE OF YOUR LIFE. Those are really fun to listen to, but let’s keep it objective and reasoned, aight? 🙂
I think to dig deeper – you would need to focus on a specific geographical area. In the United States, the cost of housing varies dramatically depending on where you are. So you would want to try to compare a rental in the same neighborhood as a house, and all the associated costs.
I’m not sure if it works this way in Singapore – but we have closing costs here – usually about 3-6%. That’s been a big factor in whether I move forward with purchasing a home. In order for the home to really be worth it, I need to live in it for at least 5 years if not more, because when I move I will have to pay closing costs again.
Hey Emma, that’s a really good point. I’ll definitely have to break it up by geography – prices vary widely even within a country as small as Singapore. Good point on the closing costs too.
Hi Lionel,
I will easily conclude that home ownership is really worth it for a Singaporean buying a HDB flat, and even more so if one is getting a BTO. I am pretty familiar with the numbers so let’s compare Owning vs Renting using 2 hypothetical but somewhat realistic scenarios.
Scenario 1: A young couple getting a 5-room BTO in Punggol (cost is $350k). The alternative is to rent a 5-room flat in Punggol too (monthly rental of $2,500).
1. Downpayment: 20% = $70K
Funds taken from CPF, opportunity cost of 2.5% = $1750/year
2. Size of mortgage: $280k
3. Mortgage payments: $1,121/mth and $13k for a year
Assuming rate of 2.6% for the HDB concessionary loan and a 30 year loan
4. Property Tax: About $200/year
Based on AV of about $11k
5. Maintainence/Renovation: $7k/year
Based on estimates of $70k for renovation + maintenance over 10 years
If you add up everything, it costs about $22k a year to maintain the flat that you own, vs $30K of rental payments. The $22k also drops to less than $10k after 30 years when you own the house fully. If you ask me, a BTO is really a steal. Just because our parents got a better deal doesn’t mean that we are not getting a good deal now.
Scenario 2: Instead of a BTO, the couple buys a similar 5-room Punggol resale flat for $550k.
Based on similar metrics (i.e. 20% downpayment, 2.6% loan rate and 30 year loans), the annual cost of owning this flat will be about (1. 2750 + 3. 1761*12 + 4. 200 + 5. $7k) = $31k
It’s slightly costlier compared to renting but I would still opt for home owndership anytime. Because fter the loan is fully paid up in year 30, the cost would drop to $10k, whereas you would still be paying that $30k if you’re renting.
It’s really much more worth it to buy rather than rent in Singapore as compared to other countries like the United States. Flats are subsidised, taxes for owner occupied flats are minimal, and mortgage rates are low. However, the conclusion might change if you’re getting a private property.