To buy or to rent a house?

In Malaysia property market environment, is it more viable to buy or rent a house?

Most people prefer to own a property because the loan you pay to the bank is equivalent to the rental you are paying, but one's financial ability will play a big part in the decision to buy or to rent a house.

Property buyers are advised to assess their finances before buying a house to ensure their ability (for example debt ratios not too high). Especially for the first timer, they should consider the stability of their jobs to ensure they will be able to service the loan repayment. If a person's debt ratio in relation to his salary is already approaching 50%, chances are banks will not approve the housing loan. If a person mortgage amount to be paid is more than half of a person's salary, the bank may have doubt in the person's ability to repay and hence require more evidence of good financial situation in order to approve the loan.

As per to date’s Employees Provident Fund (EPF) policy, house buyers can utilize their EPF savings to purchase a property. Couple with the easy payment schemes offered by banks and first-time house buyers are qualify for loans of up to 90%, owning a house has become easier than the years before.

During Budget 2011, the Government mentioned it will implement a scheme called "Skim Rumah Pertamaku" or "My First House" through Cagamas Bhd, which will provide a guarantee on the 10% deposit for houses below RM220,000. This scheme is for first-time house buyers earn less than RM3,000 household income per month. With this, the house buyers will receive a 100% loan without paying for the 10% down payment. On top of that, first-timer will also be exempted from stamp duty of 50% on instruments of transfer on house prices below RM350,000. The Government also proposed that a stamp duty exemption to be given on loan agreement instruments to finance such first-timer.

For those who rent a house in today's environment of rising prices, he or she will never benefit from the appreciation in the property value. Moreover, even if the value of the property does not increase over time, the mortgage balance decreases and equity accumulated.

Many people also see property as a way to fight inflation. With the sight of inflation creeping up, any delay in buying a property will result in paying more lately. In terms of disadvantages in owning a house, there are many variable costs involved, for example the quit rent, assessment, service or maintenance fees and insurance among others. Selling the house may also not be as quick as, say, disposing your share investments in stock market. The whole process of selling can take up to a year, depending on the location of the property. If there is already a potential house buyer, the process can be shortened for up to 3 months.

The following scenario is a quantitative example between buying and renting a property.

A typical average 2-storey terrace house at the edge of Kuala Lumpur city, may cost around RM400,000 and the rent is RM1,500 a month. The net yield comes up to 3.8%, a reasonable yield for landed property. Assuming the household income is about RM7,000 a month, this means that the ratio of the household income per year to the property price is 4.76 times. To buy this house based on 90% loan financing at a fixed interest rate for 30 years, you would have to pay a 5% interest, which means a monthly expense of approximately RM1,900 a month. Hence, it is clearly better to rent than buy.

Still, this analysis is based on what is considered the typical housing type. Different considerations may apply for different types of housing units in different locations. Another powerful motivation in favour of buying rather than renting is the social imperative to own a home. Owning a house allows you to raise credit as and when it is needed, for all kind of purposes. Hence, this is a powerful motivation for property ownership.

Based on the article by Hong Yie Chong