2014-06-27

China: Rent vs Buy

When I look at rents vs home prices in many parts of China, there is no way residential housing makes financial sense from an investment perspective unless you expect rapid price appreciation. In some cities an entire year of rent may only come to the cost 1 sq meter of property. In terms of yield, residential property rental is only competitive with the lowest bank deposit rates, it cannot hold a candle to WMPs or online money market funds. Although no one is interested in buying at the moment, there are plenty of stocks that offer competitive yields and offer inflation protection. As an investor I'd be buying shares.

This article below runs some specific numbers for Nanjing.

A 70 sqm apartment, total price ¥600,000, or ¥8571 per sqm. Buying directly from the developer, the home buyer must pay a ¥180,000 down payment (30%); the balance of ¥420,0000 is borrowed. Adding in sales taxes and the property management fund adds another ¥24,000, so the buyer needs ¥204,000 cash up front.

Assuming the loan is for 15 years and the borrower receives the 15% discount off the benchmark 7.38% mortgage rate, they will pay 6.273% interest on the loan. They will pay ¥3606 yuan per month for 15 years, with interest costs totaling ¥229,000.

Total costs is ¥180,000 down payment; ¥24,000 taxes and fees; ¥420,0000 loan principle; ¥229,000 in interest. A grand total of ¥853,000.

If the buyer decides instead to rent the same apartment, they must pay ¥1706 per month in rent. The other ¥1900 per month that would have gone to the mortgage, goes into the bank each month and adds to the ¥204,000 that would have otherwise gone to the down payment, taxes and fees. Assuming the money is put into a 1 year CD each year for 15 years, currently yielding 3.33%, the renter would earn ¥129,000 in interest on the lump sum and ¥85,000 on the monthly additions.

Assuming no rent increase, the renter pays ¥307,000 in rent. But the down payment and savings (¥1900 a month for 15 years comes to ¥342,000), plus the interest of ¥214,000, comes to ¥760,000.

In order for the home buyer to have the home worth ¥760,000 at the end, would require the price to rise from ¥8571 per sqm to ¥10857 per sqm, an increase of 26.7%.


买房和租房15年后的生活对比
One side is whistling prices jump up, the other side of the bank's rate hike and heard the sound of market regulation initiatives frequently "punch" so many people caught up in what is the cost of buying or renting more confusion. Public Wang on this phone call, ask reporters to help count afterwards. Second-hand housing professionals to set in the main urban area of 70 square meters, the total price of 600,000 yuan of real estate, for example, carefully compare the pros and cons of buying a house and renting.

In addition to setting the value of the property, in order to facilitate the calculation, analysts also assume intend to solve the housing problem of the person 20.4 million in cash on hand, and can be disposed of 3,606 yuan a month of spare cash. If you buy directly from the developer's words, buyers need to down 180,000 yuan, and handle commercial loans 420 000, in 15 years to pay off. Based on the existing preferential interest rate 7.38% and 15%, the actual rate mortgage is 6.273%, for the month to 3,606 yuan per month, for 15 years the total interest of 22.9 million. Plus 2% and 2% of the property deed maintenance fund to pay when buying (in multi-storey residential for example), taxes were to spend 24,000.

Total cost of the above together, the cost of buying this house, including cash 204,000 (including 180,000 down payment, taxes 24,000), invested 3,606 yuan a month, after 15 years is 649,000 (equivalent to 420,000 loans, interest 22.9 million). In other words, after 15 years, buyers have spent 853,000 yuan a house.

If you use the same money to rent a property with the words, for ease of calculation, the person renting the hands of 20.4 million for savings and spare cash 3,606 yuan a month apart, with a monthly rent of 1,706 yuan, and the remaining 1,900 yuan still used as a savings. Among them, 204,000 yuan for a 15-year time deposits, compound interest calculation, the new deposit rate is 3.33%, 15-year profit of 12.9 million yuan. In addition, based upon the bank deposit 1,900 yuan per month, simple interest calculation, taking the average interest rate of 3.33%, 15 years down the interest on deposits is actually about 8.5 million.

Rentals: 15 years after funds owned 760,000

To sum up, the total capital of renters spent 853,000 yuan remains unchanged, the actual expenditure was 1,706 yuan per month rent, the total after 15 years was 30.7 million, and increased profits for the 129,000 plus 85,000 equals 214,000. In other words, renters in the balance after 15 years is 853 000 -30.7 Wan +21.4 million = 760,000.

Comparison: prices rose only cost to buy a house

Analysts said that in this example, the difference between renting and buy a house in that: when the same money invested after 15 years, homebuyers have a home, and renters are holding 760,000 yuan, it is to compare this then the house is worth 600,000 to 760,000 added. Calculated according to the total price of 600,000 yuan, the property is priced at 8,571 yuan; If calculated in accordance with the words of 760,000 yuan, the price must reach 10,857 yuan, that is, only the price per square meter rose 2,286 yuan, home buyers and renters was called "tie"; If or flat, then buy a house is not worth; If prices fall, thanks to more home buyers.

Professionals said that from the perspective of trends in real estate development, once prices approaching the million mark, the price increase will become increasingly slow and the possibility of a sharp rise in house prices in Nanjing is not large. It is worth mentioning that the central bank to raise interest rates "footsteps" I am afraid that will continue during the year, this way, to buy a house costs will continue to increase in the long term, renting may be more suited to resolve their housing needs.

Weapon: Who is suitable to rent

Suitable for renting crowd divided into three categories

One young man entering the workplace, especially university graduates, their economy is not strong, especially choose to rent shared more cost effective.

Second, a large crowd job mobility, if the work is not yet stable buy at the time, once the job transfers, accommodation units and the situation appears more distant, it will generate a lot of money in transportation costs.

Third, unstable income groups, if blindly home loans, once the situation is difficult to repay the emergence of real estate may even be forfeited. In comparison, suitable for buying real estate in the crowd should be relatively mature, white-collar workers, including many years, economic strength, but also a strong desire to upgrade some home buyers, existing home to buy a new house can be sold to satisfy the pursuit of quality of life. In addition, if the couple getting married insufficient funds, then used the new premises within the city limits is a good marriage room selection.

1 comment:

  1. But one day that Nanjing apartment will be priced like a shoebox in Hong Kong and sell at 30,000 RMB per square meter !!

    Or so they think...

    ReplyDelete