Why Home Ownership May Not Always Be the Best Decision

“Renting is as good as throwing away money!” I’m sure many of us would have heard this phrase before.

That is hardly surprising, considering one of the longest standing beliefs among Singaporeans I’ve talked to is that buying a home is always better than renting one.

However, this might, in fact, be jumping to a conclusion without considering the many facets of the decision-making process. People who are looking to move out of their family home need to realise that there is no one size fits all decision. It is therefore important to look at both sides of the coin before making one of the biggest financial decisions of your lifetime.

In this three-part article, I will highlight the key differences between home-ownership and renting a home and how we can use a calculator to find out which would make the best financial sense.

This will be split into (1) home ownership, (2) renting and (3) how to make a decision.

Why Singaporeans buy homes?

Home ownership has been the more popular decision amongst Singaporeans since the 1970s. This is well illustrated by the fact that around 90% of Singaporeans are considered to be homeowners. In fact, Singapore has the second highest home ownership rate in the world. So why do Singaporeans prefer buying property rather than renting?

  • Tax benefits and use of CPF to pay off the mortgage.

One of the biggest advantages to buying a home amongst Singaporeans is the ability to use your Central Provident Fund (CPF) to pay off the monthly mortgage and part of the initial down payment. This is a huge draw for Singaporeans who would rather keep their disposable income available to them.

  • Low-interest rate environment

Singaporeans have had the luxury of a low-interest rate for the last few years. This is great for homebuyers who are looking to leverage to purchase their new home.

  • History of property value appreciation

The Singapore property market has been consistently appreciating the last four decades. Although there have been slumps in the market in recent times due to the property cooling measures, property has risen in value substantially over the longer term.

  • Other non-financial benefits

There is a certain level of status attached to owning a home that is attractive to many Singaporeans. Besides that, home ownership also provides one with flexibility, comfort and greater privacy than renting.

Arguments against buying a home

On the contrary, there are a few legitimate reasons not to own a home. The last few generations of Singaporeans have favoured home ownership due to the affordability of HDBs and low-interest rate. However, things have most definitely changed in recent years, with the property cooling measures and property market slow down. Here are a few disadvantages of buying a property.

  • Loss of liquidity and opportunity cost

One of the main arguments against buying a property is the loss of liquidity. This is especially important for Singaporeans who might want to use the liquidity to invest in other assets like stocks, which may perform better than property.

  • Property cooling measures have increased stamp duty

There is now an additional stamp duty charges applicable to home buyers. This may set them further back financially and increase the opportunity cost involved in homeownership

  • Maintenance and running cost

Unlike renting a home, owners need to pay for any maintenance cost and management fees.

  • Property prices may stagnate due to regulations

This is another major factor to consider if you are thinking of buying a home. A home is a big investment and most new home owners put a considerable amount of their total wealth into their home deposit and mortgage. If the property value does not appreciate, it can mean a negative return on their investment. This could be the case in the near future due to Monetary Authority of Singapore’s reluctance to ease the property cooling measures. If recent trend is anything to go by, the 12% decline in property prices since its peak in 2014 may also be a worrying sign for new homeowners.

  • Other non-financial reasons

Homeowners cannot easily relocate. It is also usually a long-term commitment that is not easily reversed.

The Foolish bottom line

There are many facets to the decision-making process individuals considering new homes should look into. Buying a home can give you stability and status and may also be rewarding financially.

However, the huge upfront capital requirement can be a major opportunity cost for savvy investors who are able to find better investments to make their money work harder for them.

Depending on our goals, each individual should carefully consider the pros and cons of buying a house before making this huge financial decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.