The question hardly seems worth asking. Is it a better deal to rent a house or to buy one? Parents are always telling their children that buying a house is a wise investment for their future, whereas renting one amounts to little more than throwing money down the drain. A closer look at the economics however, shows that this view may be very mistaken.
We must be mindful that the first-time home occupier with a limited disposal income will often devote a smaller share of their income to rent than as an owner-occupier who will have to devote a larger portion to the repayments of their mortgage (in both cases, this is
money handed over to someone else and is never seen again). Thus, which is the better scheme will depend on the prevailing interest rates.
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In Malaysia today, even with the current low interest rates, the average ratio of mortgage repayments to income is much higher than the rental-to-income ratio by as much as 50% with the current rentals being offered in today’s market.
That calculation nonetheless does not include the cost of owner-occupation as they face several costs that renters do not. For example, local quit rent and assessment, insurance, and transaction costs when purchasing a property (transaction costs for renting tend to be trivial).
In addition to this, owner-occupiers must also account for wear and tear (about 1% of the value of the houses in their possession). Home ownership also carries opportunity costs. In recent decades, housing has proven to be a good investment that may well continue. But capital locked up in a house could make higher returns if invested elsewhere.
Here in Malaysia, we have introduced a slew of generous fiscal incentives for first-time homebuyers. In doing so, the government forgoes a huge amount of revenue through subsidies and tax incentives. Yet, the factors pushing home ownership down are now stronger. One possibility is that younger folk may be less interested in home ownership. After all, many Millennials desire “asset-light” lives in which they rent cars, music, and clothes, rather than owning them. Why not housing too?
Economic factors may be a bigger cause of the decline in home ownership. With weak earnings growth since the 2008 crisis, young folk have struggled to accumulate savings for a down payment. Low wages offered for new graduates entering the job market and tighter regulation of mortgage markets since 2016 have made it tougher for first-time homebuyers to acquire finance. All this has led to the huge overhang of properties in the market. Further incentives were created; enticing first-time homebuyers to take on a 30 to 35-year loan debt on a property whereby in probability, the value will not show the same sparkling appreciation their parents experienced decades ago.
Current housing prices offered to first-time homebuyers provide an investment return of 2% and a drain on disposable income, leaving Millennials to opt for renting versus buying, thus paving the way for the next great disruption in our housing market.
