It’s better to rent than to buy

Ku Swee Yong
Paul Ho
/ Century 21,, The Edge Property
August 24, 2015 9:00 AM SGT
Residential property prices have softened by 7% over the last two years. A common question we hear these days is, “Should I buy now?”
Given all the facts about the oversupply of residential properties, high vacancies, declining rentals and the threat of interest-rate hikes, many are still itching to enter the market.
We examine the case of the Tan family, which has a household income of $14,000 per month. The Tans are looking to upgrade to Bukit Timah from Sengkang as their children are studying in the top secondary schools there and they do not want them to have to endure the daily commute of more than two hours to and from school. They are considering a 1,345 sq ft, 3+1 bedroom private apartment whose owner has advertised for rent at $4,500 per month and for sale at $1.65 million.
Sell and rent in Bukit Timah
If the Tans sell their Sengkang HDB flat for $450,000 and rent the private apartment for the next four years, their household expenses for accommodation would be locked in at $4,500 x 12 x 4 = $216,000.
Assuming they receive $250,000 of CPF money and another $200,000 in cash from the proceeds of the sale of the HDB flat. Over the next four years, together with their monthly CPF contributions, they would have earned 2.5% interest on their CPF balance in the Ordinary Account, or about $12,600. The $200,000 cash they received, if prudently invested, would return at least 3.0% per annum, or about $25,000 over the four years.
Overall, the rental payments and additional returns from investments would be equal to a net expense of about $178,400. On a cash basis, because the interest earned in CPF cannot be used for rental expenses, the Tans would have reduced their cash position by $191,000.
Sell and buy
If the Tans sell their Sengkang HDB flat for about $450,000 and buy the apartment, they will need to top up $210,000 in order to pay a $660,000 downpayment, a prudent decision not to stretch their lending beyond the 60% loan-to-value ratio. Their CPF contribution would be $300,000 and their cash contribution $360,000. They will need to take a 25-year loan of $990,000 at a rate of 1.7% per annum. In this case, their costs for the next four years would be $220,461 (see table below).