Renting May Outperform Buying as Home Loan Rates Climb

As the US Federal Reserve raises interest rates, Singaporeans are reconsidering the financial wisdom of buying private property. Higher interest rates could make home loans more expensive, potentially shifting the balance in favor of renting. For example, a S$2.5 million resale condo purchased with a 25-year loan at varying interest rates (2%, 3%, and 4%) would result in total repayments of S$2.38 million, S$2.67 million, and S$2.97 million, respectively. Over 25 years, the financial outcome of buying versus renting could be comparable, especially if renters invest their equity in high-quality stocks.

Buying a new Housing & Development Board (HDB) flat remains a financially sound choice due to subsidized prices. However, for private property buyers, the opportunity cost of tying up equity in a home could be significant. Renting and investing that equity in equities yielding a 3.5% dividend and 5% annual price growth could potentially outperform homeownership, particularly if home loan rates rise. The net cash flow from selling equities after 25 years could rival or exceed that of selling a private home, especially when dividends are reinvested.

The Urban Redevelopment Authority reported a 1.4% quarterly increase in private housing prices for Q3, with landed homes rising faster than non-landed properties. Over 10 and 15 years, private home prices have grown at 4.9% and 2.8% annually, respectively. Despite these gains, the financial benefits of homeownership may diminish if loan rates climb, making renting and investing a more attractive option for some.

For younger couples, renting for several years before buying a subsidized HDB flat in retirement could offer financial advantages, including priority in the Build-To-Order (BTO) exercise and potential housing grants. While homeownership remains a cultural preference in Singapore, higher interest rates may prompt more people to reconsider the traditional path of buying private property.