Paying rent in the interim makes sense for would-be first time home buyers

Nov 21, 2022

Paying rent for a home in the interim can be rational for potential home buyers, but beware of rising home rental rates.

TRADITIONALLY, many young adult Singaporeans lived with their parents until marriage. But more people may now be flying the coop and renting a place away from one’s parents. The PropertyGuru Singapore Consumer Sentiment Study for the second half of 2022 found that 66 per cent of Singaporeans between the ages of 22 to 29 chose to rent instead of buy a home due to the lack of savings.

Is renting a home an irrational choice, as monies paid in rent are being used to fund the retirement needs of landlords or generate profits for investors in co-living spaces? 

Over a decade back, I was working in Hong Kong. I was a few months into my job then when my wife, who was visiting me from Singapore, got me over the line in buying a small flat there. Reason for purchase being that the rental income I was paying could be better used to service mortgage repayments for an asset which can grow in value. I have since sold my flat in Hong Kong for a gain. 

Homeownership is deeply ingrained in many Singaporeans. It makes sense to bet on the growth in value of homes here given Singapore’s political stability and social cohesion, as well as sound economic growth prospects. Also, urban planning and public infrastructure are good. In a turbulent world, owning a home provides one a sense of security and a place to build memories.

Nonetheless, renting a home can be rational for would-be first time home buyers. 

For people who intend to buy their own homes soon, paying rent in the interim can be a good use of monies. Some young single adults and married couples may find living with parents restrictive, which can hurt productivity at work and undermine mental well-being.

The BTO wait

For Singaporeans who are eligible to buy Housing and Development Board (HDB) build-to-order (BTO) flats, buying a BTO flat is likely the optimal choice as these flats are sold at subsidised prices. In the August BTO exercise, 4-room flats at Central Weave @ AMK were priced at S$535,000 to S$676,000 versus resale prices of 4-room flats nearby, which had remaining leases of 89 to 95 years, of S$690,000 to S$918,000. Based on the mid-point of the price ranges, the resale units are about 33 per cent costlier than the BTO units. 

However, securing a 4-room BTO flat at Central Weave @ AMK was not easy, as the application rate among non-elderly first timers was 8.7 times. This rate was 17.2 times for 4-room BTO flats at Sun Plaza Spring in Tampines. 

One may secure a BTO unit more easily by applying for a unit in some non-mature estates or trying for a 3-room flat. But it can make sense to be patient and to incur rental expenses while waiting to secure the right BTO unit as a first time applicant. 

Some young couples, who plan to have children, may want a larger-sized unit or desire to live near a sought-after school. Also, some BTO buyers may want to secure larger units, or a unit on a high floor or with good facing, in order to maximise the gains from having the privilege of buying a BTO unit. As allocation of BTO units clearly prioritises first-time applicants over second-timers, first timers may want to be selective in getting the right BTO unit. 

Transaction costs

Another key reason for a potential first time home buyer to rent a home for possibly a fairly long duration is that one wants to get one’s home purchase right because there are significant transaction costs incurred in buying and selling homes. 

Buyer’s Stamp Duty is 1 per cent for the first S$180,000, 2 per cent for the next S$180,000, 3 per cent for the next S$640,000 and 4 per cent for the remaining amount in excess of S$1 million. When one sells a home to move to another place, one may incur sales commission of around 2 per cent plus relocation costs. There are also legal fees incurred in transacting homes.

Some recent new private home launches have seen strong response. As one may fail to secure a desired unit at a new condominium development, one may need to rent first while waiting for luck to shine and the right dream home to come along.

Growing savings and earnings

Paying rent on accommodation is an expense. However, it may be wise to incur such expenses while building up savings and earning power to buy one’s first home. As one pays rent, one’s savings in the CPF Ordinary Account, which pays an interest rate of at least 2.5 per cent per annum, could be building up steadily. These savings can be used later to help fund the purchase of a home.

For young adults, who may see strong income growth over the first 10-15 years of their working life, it can pay to rent first and then commit to buy a home when one’s income is much higher. In lending to home buyers, banks have to consider the portion of a borrower’s gross monthly income that goes towards repaying the monthly debt obligations, with the total debt servicing ratio capped at 55 per cent.

Given the disruptions in the job market and time needed to find one’s feet career wise, some young adults may find it prudent to rent first before being ready to commit to servicing a home loan that can potentially stretch for up to 30 years for HDB homes and 35 years for private homes. Also, some young adults may want to rent a home first, so they can deploy capital to chasing entrepreneurial dreams that may yield big returns. 

Renting first while waiting for the right unit, the right time in a cycle or the right time in one’s life to buy a home makes sense. However, the market today is rough for home renters - the Urban Redevelopment Authority’s rental index of private homes at Q3 2022 was up about 24 per cent year-on-year. Still, with more homes being completed and economic growth slowing, some bargaining power may start returning to home renters soon.