As Singapore and Hong Kong residents grapple with inflation and rising interest rates, is it better to rent or buy?
As inflation hits and the world faces a recession, today's aspiring homeowners are struggling more than ever to get on the housing ladder.
People are in a quandary as to whether to buy a house now, or to rent and hold off buying until house prices come down. But unless you're confident about catching the bottom of the property cycle, it is incredibly difficult to time the market. On the other hand, there's also no guarantee that home prices will definitely come down.
History has also shown that real estate prices typically rise in inflationary periods, especially alongside strong economic growth and a declining land supply.
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Whether to buy or rent will ultimately boil down to a combination of factors and each individual's circumstances.
As interest rates rise, this will translate into higher mortgage rates for homeowners and potential buyers. Owners with a large outstanding loan will find themselves having to pay even more each month.
In recent months, Hong Kong's base rate rose to 1.25 per cent, the highest increase in 22 years, while Singapore's median mortgage rates have nearly doubled in the last six months alone, and Malaysia's central bank has raised its overnight policy rate to 2 per cent. With the US Federal Reserve guiding for potentially six more hikes this year, interest rates will likely continue to climb.
Typically, if your mortgage now takes up a higher portion of your take-home pay, you could cut down your other expenses instead. But if inflation is also causing the prices of almost everything else to increase, then your groceries, electricity and other necessities will also cost more.
But if you are worried about having to finance a higher mortgage loan in the first place, note renting may not spare you from the pain, either.
As a tenant, you are at the mercy of your landlord's decisions. If he or she raises your rent or gives you notice to move out, there's little you can do about it.
And of course, instead of shouldering the full financial burden by themselves, landlords often choose to pass through rising costs to their tenants in the form of higher monthly rent.
While we cannot control macro factors, there will always be good deals in the market, so what's more important is for us to do our due diligence and spend time looking, instead of rushing into a property purchase.
That's why before you decide whether to buy or rent, the first question you should ask yourself is whether you view your property as an asset or liability.
As a homeowner, you not only own an asset but can also borrow against it. The mortgage that you pay down each month translates into higher equity and your net worth.
Whether interest rates go up or down in the short to long term is not within the homebuyer's control, so a better way to approach this would be to check if you can still afford to pay your mortgage even if interest rates continue rising.
The 1980s can be a good reference point, as the Fed similarly raised interest rates then to fight double-digit inflation in the US.
Mortgage rates then went up to as high as 18 per cent in that decade.
Start by calculating how much percentage of your monthly take-home pay your current mortgage will cost you. Then, increase the estimated interest rates payable to double, or even triple, and see if you can still afford that.
At 2 per cent, a loan of S$1.5 million (US$1.08 million) with a tenure of 25 years will presently cost you S$6,350 in monthly mortgage repayments. If this already takes up the bulk of your income, then any further hike likely means you'll need to dip into your savings. A more prudent move might be to go for a smaller or less expensive property.
Should interest rates rise to 8-10 per cent, your monthly repayment may now become S$11,580 to S$13,650 a month. You may then want to check how long of a period your savings can tide you through, while waiting for interest rates to come down again.
Always have a margin of safety because you cannot control interest rates, but you can control how much of your income you allocate to paying your mortgage in the first place.
A decade ago, many people already felt Hong Kong property was too expensive. Today, Hong Kong's property prices have almost doubled since.
Similarly in Singapore, many felt that prices used to be expensive at around S$1,000 per square foot. Last year, when prices hit S$1,500+ psf, people talked about how it used to be much lower, so some even chose to hold off their purchases, believing that the pandemic would cause prices to go down.
Even the cooling measures have not dampened property prices. Today, with average prices closer to S$1,800-2,200, these people wish they had bought back then.
We all want to buy property at yesterday's prices. But that may not happen. Be careful of anchoring property prices to what they used to be.
Let us remember that at almost every single point in time (even for our parents), property has always been deemed to be expensive. What is more important is to evaluate what a property means to us and whether we can reasonably finance it.
While most people may prefer to own their property, there's no right or wrong answer. If you're already struggling to pay today's mortgage rates, it may be wiser to hold off your purchase until you're in a stronger financial position.
At the end of the day, as long as you do not pay more than what you can afford, take the time to do the right research and follow a proper strategy, it is unlikely you'll fall into financial ruin from buying a property.
This will be true no matter how uncertain the market seems to be, or how high current property prices are.
This article originally appeared on the South China Morning Post (SCMP).
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