Analysis

By Anthony Galliano

In my home country, home ownership is an essential part of the American Dream, and this is now becoming the case in most parts of the world.

Home ownership in the United States is close to 70 percent, compared to  69 percent in the UK, 85 percent in Spain, 55 percent in France and 42 percent in Germany. 

In the US, home ownership was traditionally in the low to mid-60 percent range until 1992, at which point it began climbing until it closed on 70 percent by the third quarter of  2007.

Over the last 12 months, the bursting of the housing bubble and the subsequent subprime mortgage crisis have resulted in a dramatic increase in foreclosures and growth in the renter population. 

The global economic crisis and resultant global  recession is expected to lead to sharply rising unemployment resulting in an increase in mortgage defaults and foreclosures. This will accelerate the present global deflation in property prices.

 Cambodia is no exception and, as property  prices fall, the big question is whether this is now the time to rent or buy.  

Big decision

Purchasing a property is one of the most important decisions one will make in a lifetime, and there are many pros and cons to consider.  The biggest financial advantage of owning a home is the investment value of a house. If you have a mortgage, every payment reduces the principal on the loan, meaning you own more of your house.  If you purchased without using credit, the value of your home, and thus your equity, increases with the market value increase in the property.

A buyer can purchase a house and rent it out for more than the total cost of ownership, which may include mortgage payments, insurance and maintenance costs.  This is particularly optimal during periods of low mortgage interest rates as interest comprises a large part of the earlier payments in a mortgage.

Home ownership also offers lifestyle flexibility as the home can be customised to the owner's tastes. Choosing a promising location both for investment and lifestyle purposes is the most critical element in purchasing a home because only three things matter in real estate - location, location and location.

Home ownership also has its disadvantages.  Property prices fall as well as rise. The present market is clearly one of decreasing property prices; therefore, equity is currently depreciating rather than appreciating. 

Although the use of mortgages in property purchases is increasing in Cambodia, it is a relatively new product and most property purchases have been historically without credit.  If you have a mortgage and property prices decrease below the amount owed in the mortgage, you are left with negative equity, meaning you owe more than the value of the property.  In the worst case you will be unable to meet your mortgage payments and the bank will foreclose.  If the property is sold for less than the mortgage, you have to cover the difference. 

If you own a property, you are responsible for its upkeep and maintenance.  Your mobility is also limited.  If you rent you can move around as you like once your lease obligations are fulfilled.

Renting rather than owning a property also has its pros and cons.  In purchasing a home, significant equity is required whether for a down payment or outright purchase.  Usually only a few months' (returnable) deposit is required when renting and monthly payments thereafter.  The landlord has responsibility for maintenance and upkeep, there is no capital at risk, and you have mobility. 

On the negative side, every rental payment goes into the pocket of the landlord with nothing to show for your investment.  Once the lease expires, the rent can be increased or the landlord can decide not to renew, thus resulting in eviction. Lifestyle choices and changes to the property are limited.

Home ownership or renting is very much a personal choice and largely impacted by other life decisions such as career choices, the area one wants to live and whether one wants to marry and start a family. 

The present global financial crisis and global depreciation of property values is inescapable, and Cambodia is and will continue to be impacted.

Real estate values have historically gone through cycles, and we are now experiencing a cycle in Cambodia.  How long and how sharp the present cycle of decreasing property prices will be is uncertain.  However, property has proven to be an attractive long-term asset, and as long as it is affordable, owning a property is usually a better choice than renting.

 

After all, we all need a place to live and want a place to call our home.  Given the present market, sitting on the sidelines awhile before making a purchase may not be a bad idea as we are now in a buyers' market.  

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Anthony Galliano is head of corporate and

institutional banking, ANZ Royal Cambodia