Rental increase NOT more than 5 percent per year.
Yesterday, I was in a casual Toastmasters meeting. It was a typical fun, laughter and everything under the sun chit-chat. A senior member who is already a senior manager and has been a T20 household for a very long time said that renting is a great option so that one is not tied down to any property.
Renting is better is true for some but not for all
I quickly reminded everyone that while the view that renting is better is true for this senior manager, it is not true for everyone. The reason is a simple one. This senior manager earns more than most working people. Thus, he has the choice to rent and he could even choose to rent somewhere expensive too versus most people who just needed to rent a simple and inexpensive place.
Renting is forever, this is the sobering truth
Remember this. Renting is forever because no homeowner would tell you that you can continue to stay just because you have paid rental to her for the past 30 years. If your salary stopped after you retire, she will offer you perhaps a 50% discount for 6 months. After that, you will need to move because she is not running a charity.
So, how much can rental affect us? Well, inequality in wealth will happen and China is taking this very seriously that they have now said that rental increase every year CANNOT be higher than 5%. They are not saying no rental increase yeah. They are saying that rental increase is capped at 5%. Let’s look at the news and then we look at what the conclusion is.
Article in South China Morning Post China will cap annual rent increases at 5 percent to rein in runaway prices and make homes affordable to job seekers. Ministry of Housing and Urban-Rural Development vice premier Han Zheng has pledged to avoid using property as a tool to boost the economy.
Under the “Housing for All” policy, rental charges in urban areas – defined as population centres with more than 500,000 residents, will not be allowed to rise by more than 5 per cent in a year.
Vice-minister Ni Hong said, “New immigrants to our cities and many young people cannot afford to buy houses or rent homes in good locations.” Ni Hong added, “Only when the young people have hope does the country have a future. The [government] places a great deal of [priority] in solving the housing difficulties faced by new immigrants in big cities.” Please do read the full article here: Article in South China Morning Post
5% increase in pay is really not a lot.
Every year when the salary increment is announced and the increase is 5 percent, everyone would feel ‘nothing much.’ That’s quite true, actually. Increment is merely to keep up with the inflation. Without a job promotion, then the increment will just sustain the working professional for another year.
Imagine RM5,000 salary, a 5% increment is RM250 per month and around RM8 extra per day. Based on the just the cost of a bowl of noodle here in the Klang Valley, than this RM8 per day is to allow the person to eat one extra bowl of noodle per day plus a glass of iced chinese tea. Sometimes, may not be enough. This is IF the salary is RM5,000. What if the salary is lower?
5% increase in rental forever is a lot…
Assuming our rental is RM1,500 per month for a small apartment unit. At 5% increase in rental per year, then the rental will double in 14 years. When we reach 38 years old, rental doubled. That’s when rental becomes RM3,000 per month. When we reach 52 years old, the rental doubled again. That’s when rental becomes RM6,000 per month. Of course by then, the value of RM6,000 may just be the value of RM1,500.Maybe a bowl of noodle at that time would be RM30?
If we are very healthy, we continue working until we are 66 and the rental doubled again. By 66, our income may have stopped. Or perhaps cut by half or more. If we have to pay rental until they day we bid goodbye, that’s easily another 10 more extra years.
I wanted to show the calculation to show how serious this is but it’s okay. I hope everyone knows how crazy the final number would be if we kept saying that we can save by renting versus buying.
Can I just invest but not into property then?
Of course you can. In fact any “good investment is a good investment” because when we invest, we did not get to spend that money. So, we are not just saving but we are accumulating the gains from our investments too. So, yes, if we could invest and get returns which are faster than the rate of rental increase, please continue investing and at the same time continue renting.
Just remember, there are now countries where the government needs to step in so that rental increase is SLOWER. That’s also a very important fact in deciding whether to continue renting of ‘losing’ a bit (mortgage higher than rental) by buying instead. Happy deciding and there is no such thing as the best way or the only way. Whichever way works, just do it.
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