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COMMENTARY: Many people believe that investing in property is a financially-prudent choice for most of us, but is that really the case?

Not always, and especially nowadays, explains startup co-founder Shawn Low. He shares how returns on investment in properties have greatly decreased overall in the past couple of decades and why because of that, property may not be as wise an investment as conventional wisdom has said it is.

Low is the co-founder of Better.com, a home ownership tech company that aims to make homeownership more accessible for everyone.

By Shawn Low

I recently went to view a showflat with my wife. It is just the two of us for now, and even factoring in the possibility of kids in future, we didn’t think that we would need much space.

However, the property agent still advised us to consider buying a larger unit or even an additional unit because it would be “a good investment” for the long haul.

This got me thinking; for folks who have spare cash after accounting for living expenses, including paying for housing needs, is it really worth buying a bigger house or even additional properties as an investment?

Everyone seems to say this is a good idea. Surely they can’t be wrong?

Conventional wisdom suggests that properties are great investments because prices always seem to be going up and they’re “real” — that is, they are physical assets and not shares in a company that can disappear overnight.

Everyone has also heard a story about so-and-so in their circle who made a 150 per cent profit from selling their house.

Yah, I keep hearing people making crazy profits from property! Is it really true?

Indeed, there was a time when property investments were often a great deal.

Based on URA data, every S$1 invested in private properties in Singapore in 1975 grew to S$10 in 1995 (10x return over 20 years). For comparison, every S$1 in the global stock market grew to S$7 (7x return) over the same period.

That was the period when Singapore transitioned from third world to first. Our economy boomed, people got richer and property prices increased significantly.

People who were homeowners during that period would have benefited from these gains.

This is, arguably, also why there is a persistent belief, particularly amongst the older generation, that property is a great investment in Singapore.

Great! So what’s the issue with buying property as investment then? It seems like a good plan.

Not so fast. We are a much more mature economy today.

From 1995 until today, every S$1 invested in private property would have only grown to S$1.30 (1.3x) on average. For HDB resale properties, S$1 in 1995 would have grown to S$2 today (2x).

In comparison, the global stock market grew 7x over the same period.

This trend is largely corroborated by other sources. The real estate analytics company UrbanZoom published a study that showed that the average private condo in Singapore returned less than CPF’s guaranteed yield of 2.5 per cent annually over the prior two decades.

More recently, DBS Group Research published a study showing that property yields were 2 per cent or slightly lower, and the ratio of a property price to annual pay of a median-income family reached a multi-year high of 15x.

This is consistent with the trend in other mature economies like the U.S., where the appreciation of property prices also consistently lag behind that of the general stock market index.

But property allows me to borrow to invest. Doesn’t that make my returns bigger?

Yes, that is right. Borrowing allows us to amplify the outcome of good investments as long as the return on investment is higher than the cost of borrowing.

However, you can only borrow up to 75 per cent of your home’s value from banks in Singapore. Even if you could multiply the 1.3x return over 20 years for private properties by two or three times through borrowing, it would still fall short of the 7x global stock market return over the same period.

Also, keep in mind that borrowing works both ways. It can amplify your gains, but it can also amplify your losses if the property were to lose value. In the same UrbanZoom study above, roughly one in five owners of private properties were sitting on paper losses.

Property investment also gives passive income if I were to rent the unit out. Surely that must count for something.

That’s also true. Rental yields have generally been around 2 per cent for property owners who rent their units out.

However, owning and renting out property also comes with associated costs. Between the mortgage interest (roughly 1 to 2 per cent), property taxes, upfront costs, maintenance costs and any gaps in occupancy periods, I would say that these roughly cancel out the gains from rental yield.

This is also not including any imputed labour costs of you having to source and manage your tenants.

But what about my cousin’s friend’s coworker’s mom who sold her property for a lot of money? What you are saying doesn’t seem to line up with that.

The numbers above are based on average outcomes across many property transactions. There will, of course, be people who do better than the average, and people who do worse off.

We will always be able to find specific properties, people or time periods that, for one reason or other, bucked the trend. For example, there was a big increase in HDB resale property prices between 2007-2012, but prices then went on to flatline for the next nine years.

I would be cautious of generalising the experience of individual properties, people or periods in the market; after all, one person winning a million-dollar Toto doesn’t mean it’s a good idea to participate in the lottery.

In addition, what advantage does the average property buyer have over others? Unless you are a seasoned real estate veteran with an eye for spotting great property deals, you are likely not spending most of your waking hours looking at property. You have access to the same public information and data sources as everyone else.

What’s the alternative then? Stocks? Isn’t that super risky? At least the property won’t disappear overnight. It’s still a physical thing made out of concrete and cement.

That brings up a good point. Investing risk is typically directly related to how concentrated your investment assets are. The more concentrated your portfolio, the more risky.

If you were to invest in a single stock, it is entirely possible that the company could go belly up. But if you were invested in a diversified index that has hundreds, if not thousands, of stocks, then the likelihood of loss is significantly reduced.

Wait, aren’t we talking about property investment here?

The same principle of asset diversification also applies to property. The majority of Singaporeans are homeowners and already have exposure to property prices through their primary home.

Given the large ticket size, property is usually also a significant component of people’s overall wealth.

Buying an investment property is adding a fairly concentrated position in one asset (the specific property) in one asset class (residential real estate) in one country (Singapore). Property appreciation can have a lot of variability, especially in a small and fast-changing place like Singapore.

For example, a new MRT line is planned and suddenly property prices shoot up around it. Or a new high-rise next to you not only obstructs your view, but also blocks further price appreciation.

You can’t control these events. Is it not risky, then, to put another chunk of your net worth into one highly illiquid asset?

That’s a bummer. Anything else I should know?

As shown, government policies can have a significant impact on housing prices. The government has been fairly upfront about wanting to keep housing affordable for Singaporeans, especially for the next generation.

Cooling measures like the additional buyer’s stamp duty have been introduced to curb speculation on the property market. There has also been talk of introducing a property gains tax as a form of taxing wealth.

These would all be a drag on returns for property investors.

Got it. Does this mean I should just not invest in property at all then?

What we have discussed above broadly suggests that the investment return on properties purchased on the open market may not be all that it’s cracked up to be. But when it comes to investments, as with most things in personal finance, it depends on your personal situation.

For investors who do not currently have any exposure to property (e.g., perhaps because they are renting their home), property could be a good diversification asset away from traditional stocks and bonds.

However, even in those cases, there is value in diversification through REITs — which is a fund that invests in multiple properties so that you diversify your risks on any single property while still gaining exposure to the asset class — as opposed to actually purchasing an investment property yourself.

These REITs are often also diversified in terms of property uses (industrial, retail, hospitality, residential) and geographies.

Products that track the Singapore REIT (S-REIT) index like the Lion-Philip S-Reit ETF (CLR) or Syfe REIT+ could be good options to consider.

You mentioned that this applies to buying property from the open market. What about BTOs then? Are they different?

I would separate buying property as an investment from buying property to live in.

The government has primarily intended for BTOs to provide affordable places to live for Singaporeans. For this reason, BTOs purchased from HDB have historically been priced at a significant discount to the market value of the property.

The discounted market value coupled with the price appreciation of the property have seen BTO owners in recent years make profits of 70 to 100 per cent, comparing the resale price after the Minimum Occupancy Period (MOP) to actual price of BTO at launch.

That’s a good 10 to 20 per cent return every year for 5 years, not even accounting for the benefits of being able to borrow up to 90 per cent if you take a HDB loan.

Wow! So BTOs for the win?

Hold up, it’s worth noting a few things.

First, because BTOs were not designed to be purely investment products, the restrictions on purchase, sale and rental during the MOP could be limiting for you if you were not also looking at it as your primary residence. Not to mention that it usually takes a few years between when you submit your application and when you get your keys.

Second, once the property appreciates to its market value upon MOP, it has not typically continued to appreciate at the same rate. It basically behaves just like any other property on the resale market after it recovers the value of the discount.

Also, as more and more BTOs surpass their MOP, it increases the supply on the resale market, and could depress resale prices going forward. Returns going forward may not be as high as in recent years.

Lastly, the government has recently introduced certain measures targeted at reducing the “lottery effect” of public housing.

For instance, flats under the new Prime Location Housing model have a longer 10-year MOP and a subsidy recovery on top of the existing resale levy upon sale. There have also been more calls to make public housing more fair.

As housing policies continue to evolve, sudden windfalls might become less likely.

So how should I think about buying a house to live in?

In thinking about where you want to live, it’s often about more than just the money. It’s also about the neighbourhood, the amenities and, yes, for many parents, whether there’s a school nearby that’s a good fit for their kids.

If the property turns out to also be a good investment (e.g., BTO), that’s a happy side benefit.

But ultimately, it’s a home - a place that we want to be happy to live in and build a family.

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Top photo by Nguyen Thu Hoai on Unsplash.