Date: 21st May 2015, Thursday
Housing - Rent vs Buy
We often get to hear the adage "Rent money is dead money". For years this has been believed to be true. Renting is a better investment when the rent is less than the total of the interest paid on mortgage plus the maintenance cost of the property and also when the prices of properties are either falling or static.
One way to tell whether it’s better to rent or buy is by checking the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. This is what you need to do: Find two similar houses (or condos or apartments), one for sale and one for rent and review its ratio.
The price-to-rent ratio = Buy Price / (Rent * 12)
In Singapore (2015) housing market where a 1,000 sqft HDB (Public Housing) flat costs $400,000 and the annual rent for a similar home is $24,000 ($2,000 per month), then the price-to-rent ratio is about 16. Or a 1,000 sqft condo (private housing) costs $1,000,000 and the annual rent for a similar home is $36,000 ($3,000 per month), then the price-to-rent ratio is about 28.
Reality Check (April 2015): 2,400 sqft apartment (upper east coast) cost $1,600,000 and the annual rent is $40,000, the price-to-rent ratio is 40.
Experts vary in their opinions as to where the rent ratio tipping point is, but most would agree that it is around 16-20. The establishes thresholds for the ratios as follows:
- 1 to 15 = much better to Buy
- 16 to 20 = maybe better the Rent than Buy
- 21 or more = much better to Rent.
The higher the ratio, the more you would need a jump in housing prices in the coming years to justify the price you are paying today. With such high levels of economic uncertainty these days, many people are not willing to give up the financial flexibility that comes with renting and fear being tied to a long-term mortgage.
Updated On: 15.05.21