Should you rent or buy a property in Singapore?

A lot of us tend to think that purchase a property is always more advantageous than leasing one in the long run because servicing the monthly mortgage is similar to paying the monthly rent. This ideology of buying a property in Singapore is common because home ownership is always the preferred choice.

However, the huge jump in property prices in Singapore over the last decade is now affecting the affordability of many people when it comes to purchasing one. Since the introduction of the property measures back in 2014, the government has managed to contain the property prices and it has to so call stabilise the property prices ever since. The rental market particularly, has witness a more than significant reduction in the rates and volume, compared to the property prices. Based on the statistics given by the Urban Redevelopment Authority (URA), rental rates has declined over 4 percent in 2016, compared to the drop in the residential non-landed private property which was only 2.6 percent. This has got many of us thinking that there are many rental deals to pick up in the market right now, but is this true? Let us have a quick look.

Seaside Residences (Upcoming at Siglap)

We will take a actual scenario right now in the private residential property market and see if it is better to buy or rent the same property in Singapore. Let us use the Sturdee Residences and its vicinity projects for reference, we will use City Square Residences, both of which are within walking distance to Farrer Park MRT. See Sturdee Residences Floor Plans

Projection on Rental

Units at City Square Residences are currently commanding at an reasonable four dollars per square foot on a monthly basis, this would mean that for an average size of a two bedroom unit, it would roughly cost around $3,230 for rental per month. Taking into consideration that the rental increment on average is annualised at 3.5 percent over the next four years. The total rent amount to be paid is over $160,000 Singapore dollars.

Tenancy Monthly Rent Annual Rent Increase Total Annual Rent
Year 1 $3,230 $38,760
Year 2 $3,327 3 percent $39,924
Year 3 $3,427 3 percent $41,124
Year 4 $3,530 3 percent $42,360
Total rent over 4 years $162,168

Projection on Buying a Property

On the basis of the recent transactions with the same development, a similar unit was sold at over $1,500,000 Singapore Dollars. Let us assume that the property purchaser is able to a mortgage loan with a thirty year tenure with the loan amount of $1,200,000 Singapore Dollars.

The upfront costs would include a downpayment of $300,000, and a buyer’s stamp duty (BSD) of $39,600. This works out to a total of $339,600. Of course, a huge amount of the money that goes to buying property is the cost of borrowing. While this can be hard to predict, we have done a simulation based on two different interest rate scenarios:

1.5 percent 2 percent
Monthly repayment $4,141 $4,435
Annual mortgage payment $49,692 $53,220
Annual maintenance costs $3,600 $3,600
Property tax $1,000 $1,000
Total costs per year $54,292 $57,820
Total costs for 4 years $217,168 $231,280

It can be seen that after the first four years, the initial costs of ownership would sum up to be a total of over $210,000 (this amount excludes the upfront costs) and it is over $55,000 more than the costs of renting for the four years. On an annual basis, you would be paying over $13,000 lesser if you were to lease the apartment instead.

But consider the scenario where the person is looking to sell this condominium after 4 years. At this point, the remaining loan principal stands at around $1.07 million. Including all upfront costs and what he had paid for the 4 years of ownership, he would need to set a minimum selling price of $1.63 million to break even. This number is also excluding all miscellaneous payments of renovation costs, agent’s commissions and bank administrative fees.

This means that over 4 years, the owner would need to have his property appreciate by about 8.3 percent. What this implies is that if the annual growth in value of the home were to be less than two percent per year, or if interest rates were to rise to more than 1.5 percent, the homeowner might have been better off renting in the coming years.

But the financial aspect is only one factor out of many for most people deciding on whether to buy or rent. Short-term factors can include the possibility of moving to other countries due to work/family, financial commitment issues such as a retrenchment possibility, and even the near-term interest rate/rental/price outlook.

For those who are looking to buy a property and sell it within the next 5 to 10 years, the provided example may give you some food for thought, since you may find that the gain may not be as much as you wished for.