Should young Singaporeans rent first and buy later?

So you voted Worker’s Party, and the folks want you out. No biggie; whether it’s singles or couples, it’s becoming more common for young Singaporeans to rent a place of their own. It’s definitely not cheap to do so, however. So, before you think about moving out, here ‘s a list of pros and cons you should use to guide your decision.

The arguments in favour of renting for young Singaporeans

The main arguments that favour renting, for young Singaporeans, are:

• Making financial preparations
• Being unable to buy where you want (for now)
• Getting psychologically prepared
• The “always a liability” view

1. Making financial preparations

If your current savings can barely allow you to buy a new home (i.e. you’ll have $0 savings left paying for the downpayment), it’ll probably be best to rent first.

Doing so can allow you to improve your financial situation before committing to buy. We generally advise buyers to save up at least six months of worth of home loan repayments before purchasing their first home.

You can estimate your monthly home loan repayment using calculators such as this one. So, if your monthly mortgage is likely to be $2,000 per month, you might want make sure you have $12,000 left to spare after paying your downpayment. Ifyou want to be super-safe, save up six months of your income.

An adequate savings fund will give you “holding power”, in the event of a crisis like losing your job or being unable to work. Six months is sufficient time to either get back on your feet, or to sell the house a reasonable price. (Note that you’ll incur a Seller’s Stamp Duty if you sell the property within three years of purchase.)

Another financial preparation for home ownership would be to pay off any existing debt, such as student loans. Reducing your debt will raise your Total Debt Servicing Ratio (TDSR), which makes it easier to qualify for the home loan you want later.

You might also want to rent until your income as reached a certain level before deciding to buy.

2. Being unable to buy where you want (for now)

If the home you have in mind is out of budget or unavailable for now, it might make sense to wait. Nothing’s worse than settling for a house that you can afford but are not fully comfortable with (i.e. a home right next to an expressway).

This is a consideration that goes beyond dollars and cents. Even though some would make the argument that renting is wasting money on something you don’t own, it’s typically still cheaper than buying one and paying the mortgage. Plus you won’t have to bear maintanence fees, if you’re renting a condo unit versus buying one.

Young and financially savvy Singaporeans may also choose to invest their existing savings and grow their money towards being able to afford the home of their dreams, and renting first makes more sense.

On the other end of the spectrum, though rare, some might choose to rent because they want to live in a place they cannot otherwise afford. They may not be able to buy a Orchard condo, for example, but they may be able to make the monthly rent. Financially this is impossible to justify, but for young and aspirational Singaporeans, it’s again not a matter of dollars and cents sometimes. It’s ok, you’ll learn 😉

3. Getting psychologically prepared

Moving out of the family home, the psychological effect of suddently having to pay a four-figure sum every month could put you in panic mode, because it’s new and sudden (no more monthly staycations).

Renting first will ease that panic, because buying one can be like running up a steep incline: once you get started, you can’t decide you’re tired and stop (not without a hard fall).

The reason is because unlike stocks, you can’t simply back out once you’ve gotten a house and expect to be financially unscathed. Aside from stamp duties, there’s agent commission and legal fees too when you sell. Also, the average time it takes to sell a house is three to six months. (For HDB flats, you have to live in it for five years before you’re allowed to sell.)

To get psychologically prepared, it might be good training to rent an apartment to allow you to work out your budgeting and any lifestyle changes, if needed.

Most importantly, you’ll also learn a thing or two about property by renting, that you otherwise wouldn’t have learnt by living with the parents. For example, you might realise that being walking distance of a supermarket or MRT is crucial.

4. The “always a liability” view

The argument for renting is based on the view that property is an asset. However, not everyone agrees with this. From another perspective, home buyers are gaining a liability and not an asset (you will still need to buy another house if you sell the house you own, and you may not want or be able to rent out rooms).

This liability argument is especially strong if you’re talking about ageing HDB flats, which has received a lot of flak lately for it’s declining value. If you’re game for some further reading, check out this article about how the value of 99-year leasehold flat could follow Bala’s curve once its past a certain age.

So, if you believe a property that you buy won’t appreciate and will lose value over time, there is less difference whether you pay the bank, or pay a landlord. One collects rent and the other collects mortgage, but you just want the one who collects less. This can make young Singaporeans decide to rent a home first, especially if they are new to the workforce, with an entry-level pay.

That said, solid financial and asset planning can help you monetise a depreciating HDB flat as an asset, earning you passive rental income down the road and help you own a condo one day. You might want to speak to a financial advisor to find out more.

The arguments against renting for young Singaporeans

Many young Singaporeans still shy away from the idea of renting, because:

• There is no asset at the end
• There is less sense of stability
• In most situations, paying rental is worse than paying a mortgage anyway

1. There is no asset at the end

The most powerful dissuasion against renting is that, at the end of paying several years rent, you have nothing to show for it. If you have been a paying a mortgage, you at least have ownership of a property.

People in this school of thought think of rental as “helping to pay the landlord’s mortgage”. As such, they are inclined to own what they can as soon as possible. They may not mind having to buy a small or undesirable location for now, in the expectations that they can sell the house later and upgrade to something better (they are assuming house prices will appreciate).

As an aside, if you own a house, it gives you access to a reverse mortgage down the road, when you’ve fully paid up your home loan. This is a low interest rate loan that you can take out, using the house as collateral.

2. There is less sense of stability

A landlord can raise the rent willy nilly. In addition, a tenant is constantly aware that they do not live in their own home–for example, there are often rules about how they can decorate the house. And if you don’t like something, you have to get permission to change it, which kind of sounds like living with parents all over again. Plus, landlords aren’t parents—they can be much worse.

To some people, this lack of stability living under a landlord is an barrier to starting a family. Few people want to have children and still be renting. After all, what happens if your landlord raises the rent, and you need to move somewhere 90 minutes away from your child’s school? So, wanting to buy may be in line with wanting to fully settle down with a life partner.

3. In most situations, paying rental is worse than paying a mortgage anyway

For HDB flats especially, landlords tend to earn around 6 to 8% in rental yield, after factoring in their mortgage. If paying rental income is going to be way more expensive than ownership, you may as well pay a mortgage and also own the house (especially if you qualify for the right loans and grants).

Case in point: A 40-year-old, 3-room resale HDB flat in Ang Mo Kio costs about $300,000. Even with interest factored in, the $400,000 you will end up paying in total over the flat’s remaining 59 years of lease will equate to $565 per month, rounded off to $600/month after factoring in conservancy charges. If you rent the same 3-room flat, it’ll cost you about $2,000 a month—more than 3 times the amount!

There are, of course, instances where paying rental is better off than paying a mortgage (e.g. renting a room), but these are few and far between.

Some more help in making the final decision to rent or buy:

If you’re still not certain whether to buy or rent, here are some general guidelines to think about. We’re not endorsing any of them or giving you financial advice however; these are just some common ways to think of the situation:

#1: Expense ratio

One common way to decide is to look at the expense ratio. If you were to buy instead of rent, would your monthly overheads (all bills including the mortgage) exceed 40% of your monthly income? If the answer is yes, it can seriously impact your lifestyle and financial stability, and you may want to consider levelling up your income before you buy, especially if you’re early in your career.

#2: Your mid-term plans

A property purchase may take a couple of years to realise capital appreciation. If you’re single and looking to start a family soon, rental might prove to be the more financially sound decision than buying to sell (assuming you aren’t rich enough to buy a second property).

#2: Emergency fund/financial buffer

As mentioned above, you may want to work on building a fund of six months of your mortgage (or six months of your income to be extra safe) before you move from tenant to homeowner.

To put things frankly, we don’t think it’s a good idea for young Singaporeans to plan to rent indefinitely. We hope you won’t still be renting 10 or 15 years from now, because the ability to call the shots for your own home is one of the most fulfilling things in life!

Are you looking to rent or buy a property and why? Let us know in the comments below!

If you liked this article, 99.co recommends 3 psychological effects you’ll experience as a first time homeowner and HDB Resale Grants: How much can you get?

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