1.0 Introduction

There are a lot of skills that people would generally expect a person to have when they come of age. The shift into adulthood for the minority with the gift of managing their finances lead to a more seamless transition. It is an undisputed fact that financial skills are imperative to sustain a high quality of life. One of the reasons as to why that would be is because at a particular point in your life, you are going to have to decide on how to finance a home. There are many ways to do it but commonly, you rent or buy.

The key thing to remember in this article is that there are no concrete answers on the best option; it depends largely on your personal context. If say you belong to the category of a “first-world poor” fresh graduate, little capital and a minimal whitecollar salary, then your choices would be limited to renting. But once you’ve climbed the corporate ladder, you may opt to purchase a house as it offers certainty and capital gains (i.e. house rises in value). Let’s take a deeper look into both of these options.

2.0 Buying a home

The price for modest housing in Malaysia averages to about RM700,000. Since you would most likely not have that much cash in up-front capital, you’d finance it with a loan, or a mortgage in bank terminology. All you’d need is a down payment and commit to subsequent monthly mortgage payments. It’s important to remember that most mortgage payments are split into interest premiums and principal payments. The premiums are the interest to the bank that loaned you the money and the principal payments are what amounts to the value of the mortgage you took. So for instance, if you borrowed RM700,000 and the interest rate is 2% p.a, a payment of RM20,000 in your first year would break down into RM14,000 for the interest (2% of RM700,000) and a principal payment RM6,000 off the RM700,000 that you owe.

These payments typically get fulfilled by the end of a 30-year period unless you have enough cash to pay off the loan at an earlier date. After all the payments have been made, you are granted with the ownership of a home. Most people dedicate into buying homes because they see it as an opportunity for investment as in most cases the value of your home continuously appreciates. With enough luck and less bubbles, you would be buying a home at a cheaper price and selling it higher. The risks of this investment would be due to the many hidden costs that would otherwise make this a very lucrative investment.

3.0 The case of rent

Figure 1

The illustration above represents the reality (albeit optimistically) the function of your value against time. For most Malaysians, the median monthly household income amounts to RM 4,585. As you progress in your career, hopefully you would earn income in increasing amounts and assuming rent would most likely cost a third of your income. The remaining income after subtracting the cost of living can be invested into a portfolio of things. The amount here can then grow with time. This is a form of payoff, by renting a house you afford the opportunity to invest your income and allow it to grow. Rent is also free from many of the recurring costs of buying a home. As in the illustration, the downside to paying rent is that it does not terminate and also increases as a function of time due to inflation. What costs RM 1,000 this year might size up to RM 1,052 with the Malaysian rate of inflation of 5.2%.

4.0 The verdict

In a wide variety of cases renting is the ideal choice as it is imminently cheaper and less tied to risk. Avoiding many of the recurring costs of buying a home forfeits you the opportunity of the large payoff if you were able to sell the home. Predicting and understanding the macroeconomic climate of your country is pivotal to making the right financial decisions. In 2008, the prices for housing in Kuala Lumpur plummeted following the global financial crisis of 2008. Opportunistically, many people predicted the following spike in prices in the preceding year as many luxury homes were revitalized. While in the following years this trend fluctuated rather arbitrarily the prices experienced a huge positive change in prices after the development of the “Greater Kuala Lumpur Plan”, specifically the MRT project which connected areas in Klang to Kuala Lumpur. The effect of which has elevated housing in those areas.

5.0 Conclusion

To rent or to buy depends largely on both your context and goals. If you are categorically a millennial who appreciates flexibility with a still-growing career, then renting is most likely ideal. For many who choose to buy a home, it is a step to take at a later stage in life, or for the more auspicious it is a gilded investment.

Download the Report and Infographic Here:

The Economics of Housing Report
The Economics of Housing Infographic



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Prepared by Aryudin Proehoeman