In Singapore where more than 90 percent of our resident households own their house (Singstat), renting a place might seem to be an absurd idea. We view our property as a valuable asset that provides security to the household and owning one may seem essential to many Singaporeans.

Though foreign to some of us, renting is a norm in many European countries such as Germany due to the highly mobile nature of their workforce. In other cities around the globe like Hong Kong, people have no choice but to rent due to the extremely high prices of property.

Property ownership is considered a significant nest egg to many Singaporeans, in particular for their retirement. The older generation was, and still is, able to make significant capital gains by selling their properties and downsizing to a smaller estate when they retire. Many millennials hope for the same.

However, it is evident that property prices are significantly higher than what they used to be during our parents’ generation, or even merely a decade ago. Are we able to finance these houses and make a profit when we retire? That remains to be seen.

With the continuous decline of the property price index in Singapore, we should be cautious of the timing that we purchase our property and avoid buying at too high a price.

In the interim of waiting to purchase a property at a lower price, renting – unless the total rental outlay can justify the wait for prices to fall – might be a good (or even better) option if you are unwilling to stay with your parents. But we may end up on the losing end if prices do not fall and our rental outlay gets increasingly higher.

So how do we know if we should rent or buy? According to an article by a famous local financial blogger AK, we can consider the “Rule of 15”. According to him, the “’Rule of 15′ says that if we could buy a home at a price that is 15 times or less the annual rent that a similar property would fetch in the area, it makes more sense to buy than to rent.”

Consider a four-room flat at Bukit Batok selling for $400,000, if the monthly rent is $2,500, then its annual rent will be $30,000 (12 x $2,500). Then multiply the annual rent by 15.

According to the rule, if the property price is 15 times or less than the annual rent, buying will be preferred.

Since 15 times the annual rent is $450,000, which is higher than the selling price, we should purchase the four-room flat instead of renting it.

You may be considering to invest in a property and subsequently renting it out to pay the mortgage. To calculate if it is feasible, you can calculate the gross rental yield of the property. The gross rental yield estimates how much you can earn by buying and renting out your property, taking into account the annual rental income and the cost of purchasing the property.

Gross rental yield = (Annual rental income / Property value) x 100

Consider a terraced house for sale in Serangoon going for $3,500,000 (prices are taken from propertyguru), assuming that you can rent it out for $8,800 per month (prices are taken from propertyguru), which adds up to $105,600 per annum. ($105,600/$3,500,000) x 100 = 3.02 percent yield from your investment. Considering this, you can decide whether to invest in a property or invest your money elsewhere with a higher yield.

However, this is assuming that you will not have any problems with finding a lessee. According to The Straits Times’ recent article, “CBRE Research noted that the vacancy rate crept up from 6.1 percent to 8.4 percent at the end of last year”.

It means lessees are having the upper hand now with many options to choose from, while landlords may have to endure through periods without rental income when they fail to find a lessee.

Of course, there are many more factors to consider when deciding whether to buy or to rent a place, for example, we assume that the property will be paid in full with cash. It is much more likely that you will need to finance it with a housing loan with a floating interest rate that may increase over the loan term, thereby increasing the cost of purchasing the house.

We also assume that there will not be additional expenses incurred to maintain the house in pristine condition etc., which is unlikely to be true. As a homeowner, one will have to be prepared to incur additional expenses (expected or not) such as paying for the property tax, maintenance and repairing fees, etc., which further increases the cost.

This article offers a starting point for Singaporeans homebuyers-to-be to have a sense of which may be a better option. Nevertheless, buying a house is a long-term commitment, and you should think it through carefully instead of making a rash decision.

If your parents insist that renting a house is out of the option, though, you might end up buying that overpriced house in the end.

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