Sense of satisfaction Singaporeans get with home ownership comes at too high a price, argues CHARLES TAN
IT’S a topic that became a popular conversation piece a few years ago when homeowners found themselves caught in the nadir of the property slump and “negative equity” entered the layman’s dictionary. “Buy or Rent?” went the question.
For almost everyone, this was ridiculously rhetorical. Why would anyone, in his right mind, want to enrich another by paying rent when he had the option to be an almighty property owner himself?
What puzzled me then — and continues to puzzle me now — is the dogged Singaporean obsession with home ownership.
Although much has changed in the past decade, many people still wouldn’t bat an eyelid at taking a 5-per-cent-per-annum compound interest, 30-year mortgage in order to buy a new condominium unit.
In countries such as the United States and the United Kingdom, renting homes is always considered a good alternative, and many who could easily qualify for a mortgage still choose to rent.
So, what makes us different?
For one, Singaporeans strongly value owning the roof over their heads. There is a mystical sense of satisfaction that we derive from the knowledge that we are not merely tenants at the whim of some capricious landlord.
Such sentiments would be justified — if we truly owned the property to begin with. All too often, we forget that even when we “buy” a home, it is the bank that really owns it. Stop paying your dues, and you get evicted all the same.
Secondly, thanks to our uncanny ability to squirrel money away, domestic borrowing costs are cheap relative to those in developed economies, while consistent growth in GDP and foreign direct investment drive property demand — and thus prices — higher.
In this sense, one might view property purchase as a profitable arbitrage opportunity. Which would be fantastic if Singapore were still a developing economy with double-digit growth, and if one’s income were as certain as one’s instalments.
Speculators must also bear in mind that property values are closely linked to economic health and employment. Thus, over-extending one’s credit line in the hope of capital gains is highly risky because things can get ugly very quickly.
An economic recession can mean paycut or retrenchment, both of which adversely affect one’s cash position. If interest instalments cannot be financed as a result of this cash flow problem, banks are also more likely to exercise their right to foreclosure. It is this double whammy of losing both “occupational income” and “home equity” that plunged many into bankruptcy after the 1997 Asian financial crisis.
Thirdly, many bemoan a dearth of alternative assets which “renters” can profitably invest in. Rental yields (at about 3 per cent) in Singapore are the lowest in Asia, but in comparison to domestic one-year fixed deposit rates (1 per cent), or Singapore Government Securities bond coupons (2 per cent), you might be forgiven for thinking 3 per cent is positively princely … until you consider that even the risk-free CPF Special Account offers 4 per cent, your loan interest is charged at 5 per cent, and that blue-chip proxies like the ST Index average well in excess of all the above-mentioned figures.
Lastly, most people who choose to buy also point to the exponential trend of housing prices. But extrapolative expectations often make for bad estimates. For example, anyone who held Microsoft stock from 20 years ago would be a millionaire today, but would you expect that performance to be replicated?
Absolutely not. That’s because while Microsoft has experienced stellar growth since its formation, its financials (and thus stock price) are starting to plateau — just as property prices in developed economies do.
Take all these things into account and you will begin to appreciate the flexibility that comes with renting. The liquidity that you free up acts as a security blanket during unforeseen periods of financial hardship, and gives you the freedom to invest in profitable projects.
Dissenters might argue that flexibility comes at a price. When the economy is doing well and property prices defy gravity — like they have recently — tenants must usually stomach rent increases without concomitant wage increases. But a rising tide lifts all boats, so while tenants pay higher rent, buyers must also pay higher interest on their flexible-rate mortgages. And given time, wages, too, must rise as workers demand more money to cope with their increased cost of living.
In short, although tenants might have to put up with higher rents in the short term, their long-term expenses should be moderated by lower rents in recessionary periods or corrections; whereas their paychecks should swell steadily, as should their savings.
With property prices as high as they are now, the case for renting has never been stronger. Would you rather pay higher rent for the next six months or get caught with negative equity when en-bloc fever subsides or a cyclical correction begins? Personally, the need for accommodation does not justify purchasing a house, and while buying property may be a good investment, I certainly would not condone doing so with borrowed money.
Ultimately, residential ownership is a very personal decision and it is a concept that has been actively promoted by the Government as part of its nation-building efforts.
For buying a house is not just another financial decision: It can also forge a sense of home and identity — and that is surely the hardest thing to put a value on.
Source: Weekend Today, 07 July 2007