You can’t call a home you live in an asset, and that down payment could be put to better use
After two years living abroad – the last six months in a beautiful but mouse-infested house in hipster East London – I was over the moon to be back in Singapore.
I relished my parents’ clean flat, the gym downstairs and my mother’s delicious home-cooked meals.
Still, after a month or two, I was keen to move out as my place in the suburbs is over an hour’s commute to the office. I had also enjoyed living downtown abroad, which I feel is the best way to fully appreciate a cosmopolitan and vibrant city
“You’re throwing money down the drain,” was a common refrain, while many emphasised that I should consider home ownership as I would “at least own something” at the end of 20 or 30 years.
I am intrigued by the deeply entrenched idea that renting a home is a poor financial decision akin to “throwing away money”.
In Singapore, it appears that buying is always considered the smarter decision – not just to have a home but also as an investment.
Plenty of people aspire to receive passive rental income. It is often pointed out that many of Singapore’s richest people made their money from real estate.
This debate is particularly pertinent just now. Market watchers suggest that this could be the right time to enter the market. Last month saw an almost four- year high in private home sales, with analysts claiming that the market is bottoming out amid higher sale volumes. Developers are bidding bullishly for land.
In Singapore, renting is too easily dismissed as “a bad investment” and buying a flat is too often seen as “a good investment decision”. In fact, it takes great investment savvy and many factors out of your control to ensure that your owner-occupied home can be monetised at a higher value. More details can be found here. I suspect many owners of shoebox units are sitting on significant losses at the moment – not to mention wealthy home owners in Sentosa Cove.
However, prices fell across the private residential and resale public housing segments in the first quarter, with the losing streak for private homes extending to 14 quarters – the longest slump in 13 years, according to data from the Urban Redevelopment Authority last month.
Vacancy rates climbed from 5 per cent at the end of 2012 to 8 per cent at the end of last year.
Meanwhile, private and public home rents have been sliding since 2013. Last year, rental rates of non-landed private residential properties fell by 3.6 per cent.
At a basic level of evaluating an investment, the fact that property prices and rental rates have been on a long downward trend suggests that it is not exactly a great investment.
However, some will argue that property prices will eventually rise – although the current debate on the issue of leases and awareness that property prices fall after a certain timeline cast doubt on the universality of that argument.
I looked to investment guru Robert Kiyosaki’s Rich Dad Poor Dad blog, in which he wrote: “Repeat after me, your house is not an asset.”
His line of thinking is that it matters little how much a property appreciates in price. What matters more is “whether it provides cash flow every month”.
“The key is to make your money on the buy, not the sell,” he said, so that one does not have to worry about whether the asset value goes up. Cash flow from a house would therefore come from the rent. So if you live in your own house, it cannot be considered an asset.
In these times when landlords are finding it hard to get tenants as the foreign workforce here declines, it is hard to consider property investment a good proposition if we go by Mr Kiyosaki’s advice.
To get to the bottom of exactly how bad renting is as a financial decision, I enlisted the help of Mr Ku Swee Yong, chief executive of International Property Advisor.
According to Mr Ku’s calculations, based on transactions from the first quarter in a Novena condominium, the cost of ownership is higher than that of rental until the fourth or fifth year, assuming that the rental amount stays flat.
In his model, the cost of ownership excludes even the down payment and repaying the loan principal.
However, rental prices have fallen markedly in recent years – so cumulatively, the cost of rental would be lower than the cost of ownership for more than five years.
Mr Ku said that with the rental market being a tenant’s market at the moment, it will be difficult for property prices to hold up their value. In that case, it’s worth paying a couple of years’ rental to wait for the price to fall, he said.
Mr Ku’s key point, however, is that the down payment for the first flat has an opportunity cost. The money could be used to further entrepreneurial aspirations, for example.
He thinks that Singapore’s high property ownership rates could come at the detriment of an entrepreneurial culture, noting that countries with flourishing small and medium-sized enterprise cultures, such as Germany, generally have a home ownership rate of about 50 per cent.
Whether a house is an asset or investment is an age-old debate I am not wading into.
And I am not saying that buying or renting is better – it depends greatly on individual circumstances.
The point that I am making is that in Singapore, renting is too easily dismissed as “a bad investment” and buying a flat is too often seen as “a good investment decision”.
In fact, it takes great investment savvy and many factors out of your control to ensure that your owner-occupied home can be monetised at a higher value. I suspect many owners of shoebox units are sitting on significant losses at the moment – not to mention wealthy home owners in Sentosa Cove.
The aspect of house buying which makes the most sense to me is the forced savings aspect, as most renters don’t tend to save the money they don’t spend on home ownership for investment.
I have also been told often that many people don’t feel like they have the savvy or time to monitor investments and, hence, prefer to buy a property.
However, for the more disciplined and financially savvy, the down payment could be put into much higher-yielding investments.
There is no question that having a mortgage makes a person more financially disciplined.
But in the current climate of regional competitiveness, technological disruption and the “new normal” of a gig economy, the renter’s flexibility and appetite to take risks and try new things – be it new careers or moving to new places – could give him or her the last laugh.