Part I Calculations on a HDB purchase versus rental (for singles)
Unrecoverable costs of Rent vs Buy
After coming across Uncle Temperament's recommendation of a Youtube video, a new concept on renting versus buying struck me - comparison of their unrecoverable costs. Which means if the unrecoverable costs of renting is less than buying, it would make sense to rent and vice versa.
Unrecoverable costs of Rent vs Buy
After coming across Uncle Temperament's recommendation of a Youtube video, a new concept on renting versus buying struck me - comparison of their unrecoverable costs. Which means if the unrecoverable costs of renting is less than buying, it would make sense to rent and vice versa.
Unrecoverable cost of renting for N years is simple as follows.
Monthly rental cost × 12 × N years.
On the other hand, the unrecoverable cost of buying a house would require a bit more complex calculations as it comprises of renovation costs, property taxes, income taxes (if renting out rooms), maintenance costs and cost of capital (mortgage interest and cost of equity capital). Cost of equity could refer to down-payment, option fees or any other money paid upfront for the property which could otherwise be invested for returns. All these vary according to the size of flat unit purchased, purchase price and condition of unit etc. Some sunken costs would be one-time and others repeating. Here I am not even factoring in the hassles of doing all of the above.
When it comes to HDB, we have another set of considerations.
Sorry if I am veering off tangent as my brain starts its wild run here.
Problem with 99-year
We know that all HDB flats have a 99-year lease. Technically speaking, gov owns the flat and lease to us even though we so-called purchase it. So if one holds the flat through 99 years (if one lives that long!) it would eventually decay to zero value aka returned to state. In which case, its purchase price also becomes an unrecoverable cost. A huge 6-figure one.
In my previous post, the example 4 rm flat has got a 70 years lease left. Given the new housing loan rules, once the flat hits 65 years or less in remaining lease, it would get more and more difficult to sell especially to the younger families (resulting in exponential price decay?). That would be in just 5 years!
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"The total amount of CPF that can be used will depend on whether the remaining lease can cover the youngest buyer until age 95. If this criteria is met, a buyer can use CPF to pay for a property up to its valuation limit. If not, the use of CPF will be pro-rated.
No CPF can be used if the remaining lease is less than 20 years."
Sources:
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That means if one doesn't like the flat afterwards or need to sell it for whatever reason, one has to sell it fast within a 5-year time frame to suffer less "decay" in its selling price. However, if he has gotten any CPF housing grant then he would have to wait out the 5 years MOP, which means... good luck.
So how?
The other ways to recover value from the property before it fully "decay" would be to rent it out (as previously mentioned), wait for SERS (chances are slim as striking lottery) and/or embark on the Lease Buyback scheme.
The other ways to recover value from the property before it fully "decay" would be to rent it out (as previously mentioned), wait for SERS (chances are slim as striking lottery) and/or embark on the Lease Buyback scheme.
Lease Buyback scheme can only be applied when the flat owner reaches 65 years or older, by then the flat would be left with 40 years lease. OK, that's some hope just don't wait until it's left with 20 years! But I can't even remotely guess whether this scheme will still be in place 30 years from now. If yes, what would be the buyback value then?
Unrecoverable cost = Purchase cost + Interests - Lease buyback value
[What's the unrecoverable cost of renting as a single for 30 years? Conservatively, it is $216,000 without inflation factored in.]
[What's the unrecoverable cost of renting as a single for 30 years? Conservatively, it is $216,000 without inflation factored in.]
From random searches on property sites, the price difference between flats that TOP in 1990s versus 2010s is approximately $100k. Should one pay $100k+ more now for about 20 more lease years to sell back in future and less likelihood of exponential "decay" after the 5 years MOP? Something to chew on...
Now it dawns on me why there's so many 1990s flat going for sale in the market and so few 2010s. All the middle-age trying to recover their housing costs (or reap profits if BTO) before it's too late??
It's a difficult choice
To buy or to rent in SG - there is no textbook formula that can fully put things into perspective when it comes to the world's one and only HDB concept. After all, there is no crystal ball to tell what will happen to one's finances, the flat and gov housing policies 20-30 years down the road.
Part 3 on Single's BTO?
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Disclaimer: Contents of this blog are personal opinions and NOT financial advice to buy or sell any mentioned securities, commodities or assets.