Renting is cheaper today versus property price, I agree. Why did this happen?

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In these recent couple of years, more and more of my younger friends are telling me that renting is now much cheaper than buying. They are working in the Klang Valley and renting homes either in Kuala Lumpur or Selangor. In fact, they shared that if they buy, they will ‘lose’ money whereas if they were to rent, they could save money every month. What they meant is that they could rent a RM600,000 high-rise for just RM2,000 plus per month. The typical mortgage for a RM600,000 home is around RM3,000. Thus, they have ‘saved’ RM1,000 per month. Actually if this is the calculation, it’s true. However, ever wondered why the rental is way below mortgage in the first place? Let’s look at three possible reasons to understand rental and property price.

Property prices rise faster. In a hot market, transactions for properties happen at a fast rate. Every transactions may mean a higher price. Assuming our neighbour sold at RM450,000 and a buyer is now approaching us, we will usually start with RM465,000 so that we have rooms for negotiation. In a hot market, we usually get our price. We are extremely happy. Our neighbour saw this and quickly adjusted his price to RM480,000 and this continues until the price reaches a point where the buyers are no longer willing to pay that extra. Or bank’s valuation for that property has reached a ceiling and they will start lending lower than 90% loan for example. This is why prices could rise very fast in a hot market.

Rental rises are sticky. When we rent a place, does the home owner come to us every few months and tell us that the rental is to be increased? Usually, it’s tough to even increase the rental every year by more than 10%. This is why when property prices rises, rental does not follow in-tandem. Rental may adjust itself every year but property prices are rising every other month due to transactions. Plus, the contract is usually for one year and any fixed adjustments will only happen at the end of the year, which is 12 months later!

Conclusion. When the rental adjusts slowly while the property prices rises faster, we will see rental yield dropping. In fact for most of these properties where the prices rose too fast or the buyers were buying them at ever higher prices from developers, very soon they will have this issue. Rental could not cover their mortgage! However, it’s very hard to maintain a rental which can cover mortgage because there are many similar units in the market where the prices did not rise as fast and thus renting out the unit becomes very competitive.

This is the reason why it seems that rental is a better option today. If the property is in a big city, continuous urbanisation meant that demand for rental properties will continue to rise. As long as property prices stay almost the same, the rental may soon catch up. If they did not, then property buying interest will dwindle further and the prices may start going down… Either way, longer term will favour owners and not renters. Happy waiting and buying a suitable property.

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