Financial Analysis: Case Study of Buy vs Rent Decision in Singapore

This case study examines the Wong family's decision to buy or rent property in Singapore after relocating in 2010. For six years, they rented a condominium, but with changes in the economy and the government's encouragement of home ownership, they are considering purchasing a home. The analysis includes the potential use of Mr. Wong's Central Provident Fund (CPF) for a home loan and eligibility for Housing and Development Board grants if he obtains citizenship. The case study uses Weighted Average Cost of Capital (WACC) and Capital Asset Pricing Model (CAPM) calculations to evaluate the financial implications, suggesting that buying property would be a beneficial long-term investment due to the absence of capital gains tax in Singapore. Desklib offers access to similar case studies and solved assignments for students.

BUY OR RENT: LIVING IN SINGAPORE
A Case Study

Contents
Discussion.............................................................................................................................................3
References.............................................................................................................................................5

Discussion
The Wong family—comprising Mr. Wong, aged 40, Mrs. Wong, aged 38, and their three
young children— relocated to Singapore in 2010 when Mr. Wong received a job offer from a
leading investment banking giant. For the next six years, they rented a three-bedroom
condominium for US$4,000 in Singapore dollars1 per month, which included parking and
condominium fees but not the maintenance cost, which was borne by the owner. Due to a
slow growth in the economy, there has been a decline in the property market of Singapore
(Lim, 2018). Rents may be lower now, but they are still expensive. Buying a house can also
generate a certain amount of income (bankbazaar.sg, 2017).
The Singapore government strongly encouraged home ownership as a form of savings. After
retirement, if the need arose, the retiree could unlock savings by moving to a smaller unit or
consider a reverse mortgage (Poh, 2017). First-timer buyers (only citizens with monthly
income below $12,000 qualified as first-time buyers) of public housing could obtain
subsidies from the government. First-time buyers of private property, such as condominiums,
would not qualify for subsidies (Tan, 2017). Suppose if Mr. Wong buy a house in the same
building which has more rooms that the family needs. If they can afford to purchase the
house which has more bedrooms than their requirement then Mr. Wong can rent them out to
someone else. Mr. Wong can use his Central Provident Fund (CPF) to buy the apartment.
A major reason why the people living in Singapore are shelling out a substantial amount of
money for real estate is because of a big percentage of their income is kept under the
provident fund by the government. In order to access that CPF money, Mr. Wong can buy a
house i.e. he can use the CPF money to repay the loan. He has to find the best home loan that
is available on the market. On the other hand, if Mr. and Mrs. Wong decide to continue
staying in a rented house then Mr. Wong will not be able to take any money from the
provident fund account. Moreover, if Mr. Wong gets Singaporean citizenship then he will be
eligible for Housing and Development Board grants. So, if Mr. Wong eventually buys a
house for the family then it will be a good investment in the long term. As there is no tax in
Singapore for capital gains, Mr. Wong will be able to keep every penny he will earn on the
property market after paying all the legal fees and taxes.
To calculate Weighted Average Cost of capital (WACC),

WACC=(E/V) * rE + (D/V) * RD – (1-Tc)
= 1,200,000/5 * 7 + 100000/5 * 6 – (1-5)
=168000+120000+4
=$ 288004
Where:
E = Market value of the firm’s equity
D = Market value of the firm’s debt
V = E + D Tc = Corporate tax rate
Again, it is important to know CAPM to make a verdict on Mr. Wong’s buying or renting
property. Given is the calculation on CAPM:
Ra = Rr f + [Ba * (Rm – Rr f)]
= 0.07 + [0.80 * (0.12 -0.03)]
=0.142
=14.2%
Where: Rrf = Risk-Free Rate
Ba = Beta
Rm = Market Rate of Return
On the basis of the above calculation, it can be suggested that, the Wong family should go for
buying property in Singapore.
References
bankbazaar.sg. (2017). Renting vs Owning a House: Which is More Practical in Singapore?
Viewed on 25th February, 2019, retrieved from https://blog.bankbazaar.sg/renting-vs-owning-
house-singapore/
Lim, J.L. (2018). Should You Buy Or Rent A Property In Singapore? Viewed on 25th
February, 2019, retrieved from https://www.imoney.sg/articles/buy-or-rent/

Poh, J. (2017). Should You Buy or Rent Your Next Home in Singapore? Viewed on 25th
February, 2019, retrieved from https://blog.moneysmart.sg/property/buy-rent-next-home-
singapore/
Redbrick Mortgage Advisory. (2017). Should you rent or buy a property in Singapore?
Viewed on 25th February, 2019, retrieved from https://www.iproperty.com.sg/news/should-
you-rent-or-buy-a-property-in-singapore/
Tan, L. (2017). Renting vs buying property in Singapore: Which is better for you? Viewed on
25th February, 2019, retrieved from https://www.99.co/blog/singapore/renting-vs-buying-
property-sinapore/