Should I rent an HDB flat?

A large portion of Singaporeans own a home. However, does buying an HDB flat make more financial sense than renting one? This article talks about the upfront costs of purchasing an HDB flat and the overall costs and flexibility of renting an HDB flat. It also covers the HDB’s Parenthood Provisional Housing Scheme (PPHS) that was created to temporarily house families, newly-wed couples and divorced or widowed parents with children.
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According to the latest numbers from Singapore Department of Statistics, the home ownership rate in Singapore in 2017 stood at 90.7 per cent. Evidently, we are a nation of people who really believe in buying.

But not all renters are foolish rebels. In fact, in some very specific circumstances, renting may make more financial sense than buying.

The Upfront Costs

No matter the type of property you want or your financial situation, the upfront costs of purchasing a property is probably the biggest hurdle in the whole experience.

To illustrate, let’s assume that most who are contemplating HDB rental flats are not eligible for Build-to-Order (BTO) flats and have to decide between renting a flat and buying on the resale HDB market. According to HDB’s statistics from the second quarter of 2018, the median resale price of four-room flats in the central area is $870,000.

Here’s what the costs look like if you wish to buy such a flat, using ultra-conservative (read: worst-case scenario) estimates that don’t factor in the benefits of any grants from HDB. There are countless payments associated with buying a resale flat, so only significant fees – those $1000 or more – are included here. And since we are being conservative, where fees have a range, the highest possible amount is used.

Upfront costs of buying a resale HDB flat

Fee Type

Rules/Calculation Method

Amount

Grant of option

Negotiated between buyer and seller, and can be any amount between $1 and $1000.

$1000

Option exercise

When this is added to the grant of option fee, the total should not exceed $5000, so it can range anywhere between $4000 and $4999.

$4000

Conveyance

This can be paid with CPF. Assuming that a private solicitor is used instead of one from HDB, the market rate is between $1800 and $2500.

$2500

Stamp duty

This can be paid with CPF. Calculated using Propertyguru’s stamp duty calculator.

$20,700

Agent commission

Typically one per cent of purchase price.

$8700

Downpayment

20 per cent of $870,000, if purchase is financed with a bank loan and not a HDB loan. At least five per cent must be paid in cash, and not by CPF.

$174,000

Total upfront costs

$210,900

Of course, a $870,000 flat in the central area is at the highest end in terms of price. Even if your CPF funds are adequate enough to cover the stamp duty, legal fees, and 15 per cent of the downpayment, you’ll still have to fork out $22,400.

On the lowest end of prices are flats in Woodlands. According to numbers released by HDB for the second quarter of 2018, the median resale price of four room flats here is $330,000.

With the stamp duty, agent commission, and downpayment adjusted for the lower purchase price, you’ll still have to pay $4800, $3300, and $66,000 for those fees respectively. Assuming the other fees remain the same, the total upfront costs work out to $81,600, of which $11,600 cannot be paid by CPF.

As the calculations show, to buy a HDB resale flat, you’ll have to save up anywhere between $11,600 and $22,400 in cash. For those of whom these cash amounts are unattainable, HDB’s Public Rental Scheme may help.

The Overall Costs

For 4-room HDB flats in the central area, HDB’s statistics show that the median monthly rent is $2750. Core inflation rate in Singapore is currently 1.9 per cent.

Here’s what your budget would look like should you choose to rent such an apartment for three years (the maximum lease duration allowed by HDB for Singaporean or Malaysian tenants), factoring in rent increases every year based on the current inflation rate.

Year 1

$2750

$33,000

Year 2

$2802

$33,624

Year 3

$2855

$34,260

Total rent over four years

$100,884

In comparison, to buy the property, assuming no grants from HDB and a purchase price of $870,000, Propertyguru’s mortgage calculator shows that the monthly mortgage will work out to be $2573.

The calculations are based on financing with a bank loan instead of HDB loan. Bank interest rates usually fall between 1.5 per cent and two per cent. Since we are being conservative, the higher interest rate of two per cent was used. The loan repayment period is taken to be 30 years, with a downpayment of 20 per cent, leaving 80 per cent of $870,000, or a mortgage of $696,000 to be repaid.

Over three years, the total amount paid to mortgage would be $92,628. Including the upfront costs of $210,900, the total amount spent at this point would be $303,528.

In these calculations, the rent rises yearly in line with inflation while the mortgage remains stagnant. Even then, for at least 20 years, the total amount a tenant spends on rent will not catch up to the amount a home owner spends after the upfront costs of buying have been factored in.

In this scenario, the only way buying can make sense is if the home owner doesn’t mind tying up his money in a property, and intends to sell it in the future for a profit. That, however, is another long set of calculations altogether.

For those who prefer more fluidity in their cashflow and who do not want to commit to a mortgage for decades, renting is preferable.

Flexibility

But while renting does allow for more flexibility than a mortgage does, it’s not always all it’s cracked up to be. The minimum lease period the law allows for HDB flats is six months, but in reality, most landlords prefer leases lasting 12 or 24 months. The flexibility of renting is something very much appreciated by those who are likely to be posted overseas for work, but if your 12 or 24-month lease coincides with overseas work posting, you’ll still be burdened with paying for a property you are not occupying.

The Renters Who are Really Buyers

Last, but not least, one reason to rent is when you’ve already purchased a property, but can’t move into your new forever home yet. HDB’s Parenthood Provisional Housing Scheme (PPHS) began as a way to temporarily house families or newly-wed couples who are waiting for their new flats to be completed. The scheme enables young couples who are awaiting their Build-to-Order (BTO) flats to begin married life together right away.

Those eligible may rent three-room flats from HDB for as low as $600 in areas like Hougang and Boon Lay. The highest priced properties are four-room flats on Tiong Bahru road. Over the years, the scheme has also expanded to provide housing for divorced or widowed parents with children.

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