Saturday, February 23, 2013

Advantages of renting a home

1. Singaporeans have the mindset that they must own their home. I wish to give some views on the need to change this mindset.

2. Owning a home make sense when property prices are low. When the prices are too high (and currently the prices are too high), it is not the obvious choice. We should be open minded and consider other options. 

3. There are advantages in renting a place to live in. When you rent, you have the freedom to move at the end of the lease period. You can move to a place that is closer to your work place or to your parents or the children's school.

4. If the rental rates are high, you bear the cost one year at a time. You can also opt to rent for 2 years or longer, if you wish to fix the rates.

5. When you buy a property at a high price, you have to pay a high mortgage for the next 20 or 30 years. You are stuck with this high cost.

6. It is possible for the property prices to go into a slump. Just see what has happened in Japan, USA and Europe. This will come to Singapore. When that happens, the property prices will stay low for a long period. Japan has the slump for more than 20 years and has not recovered yet.

7. If you are renting a place, you will be able to buy a property at a lower price, maybe up to 50% cheaper, in a slump. If you have bought before, you will not be able to take advantage of this opportunity.

8. In Singapore, you are allowed to use your CPF savings to pay for your home, but not for rental. This force most people to buy a property. If you do not join the herd, you have the option to invest your CPF savings in blue chip shares or an index fund, and earn a long term yield of 6% (my guess). This yield is better than the yield on properties bought at an inflated price.

9. If you rent a property, you can pay up to 25% of your annual income for the rent. This may be painful, but it is for one year at a time. When there is an over supply, you can expect the rental to drop by up to 50%. At that time, you will pay a much lower rental or you can buy a property at a lower price.

10. For young couples who are newly married, you can stay with your parents, if they have a room for you to use. Alternatively, you can rent a room from another family. If you do not have any children or just one baby, a room is sufficient.

11. It is all right to buy a new flat from the HDB, i.e. a BTO flat, as the price is much lower than the market price. Be patient and wait for the BTO flat. In the meantime, consider renting as an option.


Xianlong said...

U are right on #8 investing in index fund instead of buying property because the herd is doing so.

Wildly inflated property price is way to risky. At least with index fund the vast bulk of companies in the fund are providing services & goods instead of speculating in real estate & leeching via rents.

TQC said...

Mr Tan,

With points 7 and 8, you implicitly assume the fund a person set aside now will be iinvested in an asset not tightly correlated to the property market. This is a quite bold assumption. SGX in fact is dominated by banks, property developers and Reits. They are more or less a leveraged play on propery.

I agree with you on other points though.

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