One of the biggest problems for Malaysians today is the lack of affordable housing, especially in major urban areas. And we don't mean low cost housing, we mean housing that is simply affordable for the average Malaysian. Property prices have soared over the years and even with the recent slow down are still beyond the means of the majority of the population.
Still, most of us still yearn for that property, saving up day by day for that time when we can get a place that we can call our own, even if its a tiny shoebox sized apartment. But does it actually still make sense to buy your own home in Malaysia?
One of our team members has been struggling with this issue recently, so we decided to do a bit of research and delve into the numbers.
In this article, we'd like to evaluate the choice between buying and renting. And this isn't about renting while you save up till you eventually buy your own home. This is about whether it is a financially wise / viable option to rent forever. At the end of the day, which option leaves you better off?
We'll be looking at this from a purely financial perspective, to see how the numbers add up. Obviously there are many other aspects to home ownership to consider, including the emotional satisfaction of having your own place, the stability of knowing that you won't get evicted, and the relative immunity from price fluctuations. However, just examining the numbers can tell us a lot, and help us make logical decisions. Certainly it doesn't make good financial sense to saddle yourself with debt that you can't manage, so this is a useful exercise for anybody to do before they commit themselves to either course of action.
To start off with, let's look at some basic numbers reflecting the state of the housing market today.
According to Bank Negara Malaysia (BNM), the median Malaysian household income of RM 4,585 suggests that affordable houses should be priced at RM 165,060 or below. The last time we saw average house prices at that level, well, let's just say when we picture those times in our head, the image appears in black and white and people are getting around on ox drawn carts. It was a while ago.
Ideal vs. Actual Median House Prices
Is this even a valid question? Isn't buying Property always better if you can afford it?
The first step to evaluating this decision is to realize that there is a decision to be made in the first place. A lot of the common 'wisdom' we hear about property is either completely untrue, or true only under certain conditions (for example if you're immortal and can wait decades for your investment to bear fruit).
So for example, the most commonly used justification for buying property is that property prices always go up (bizarrely this is most often quoted by property agents or get rich quick gurus). Which if fine, except that it is clearly not true and a simple look at historical price indexes will show you that its never been true, in any country, anywhere in the world.
Like almost any other asset, property prices fluctuate, and perhaps more than many assets, the market is imperfect, giving rise to large variations in prices at any given time. Its very possible to lose a lot of money by investing in the wrong property at the wrong time. In fact, factoring in inflation, many buyers of properties in Malaysia and Singapore during the peak in the 90s are still losing money on their properties today. While its probable that eventually prices will reach a point where they can break even or even make money, there are far better ways that they could have invested their money and they are certainly much worse off than they otherwise would have been.
Another common perception is that when you buy a house, the monthly payments you make go towards paying off your debt and building equity in your house, which is essentially savings for you, whereas when you rent a house, you're paying off someone else's debt, and the money vanishes as far as you're concerned, never to be seen again. This is only partially true; the reality is a little more complex than that, and we're going to work through the numbers in this series of articles (yes, series, we just realized this topic is longer than we thought and we'll need more than one post to cover it and our lunch break is almost over!).
The decision to buy or to rent should take into account many factors, but at the most basic level its about the relative affordability between buying and renting. As the disparity between the price of buying and renting increases, at some point, buying no longer makes sense (and vice versa). For example, if a condo is selling for RM 600,000 and the rental is RM 6,000 a month, you might as well buy the condo upfront since the yield is 12% and the condo will comfortably pay for itself. However, if that same condo was renting at only RM 500 a month, then very clearly you should rent it and not buy it. At RM 500 a month you would be able to rent it for 1,200 months, or 100 years before spending RM 600,000, not to mention all the interest, maintenance fees and other costs you would save. Plus you'd be able to invest the money saved and after 100 years of compound gains you'd have far more than RM 600,000 in the bank.
Obviously, this is an extreme example, but its clear that there is a certain point beyond which it makes no sense to either buy or to rent, depending on the numbers involved (and what happens in the future). So how do we calculate what that point is?
In the next part of this series, we'll introduce other factors which affect this decision (it can get a lot more complicated than this simple example), and show you how to calculate this yourself with specific examples.
