Why I'm not Convinced by Property Investment

 

Investing in property is one of the most popular choice for many people in Singapore, with the promise of high returns and stable investment being a major draw. The staunch belief that property is a 'sure-win' has been ingrained into many, especially for the older generation who witnessed the phenomenal rise in property value as Singapore transited from a third world to first. The recency bias due to the surge in housing prices over the past 2 years also reinforced this view. However, the reality of the property investment today may not be as rosy as portrayed by the media and real estate industry.

Opaque costs of property investment

Whenever I hear people share about their property gains, they only focus on two numbers: purchase price and selling price. However, when investing in property, there are many hidden costs to consider, including:

1. Stamp Duty: A tax paid when purchasing a property, based on the purchase price or market value of the property, whichever is higher.

2. Legal Fees: Fees paid to a lawyer for handling the conveyancing process and preparing the sales and purchase agreement.

3. Agent Commission: Commission fees paid to a real estate agent for handling the transaction and providing professional advice.

4. Maintenance Fees: Ongoing fees paid to the property management company for maintaining the common areas and facilities of a property.

5. Renovation Costs: Any costs incurred for renovating or updating a property.

6. Property Taxes: An annual tax based on the assessed value of the property.

7. Financing Costs: Interest and fees associated with taking out a mortgage to finance the purchase of a property.

It is important to factor these costs into your budget when planning to invest in property. However, such data are hard to come by, and many property owners probably don't track these costs closely, making it difficult to holistically assess the returns of property investment.

Cyclical risk

Like in any market, the property market has its ups and downs, and investors who buy at the wrong time can end up with a property that takes longer to appreciate in value than they had hoped. This can result in a lower return on investment, or even a loss, which can be devastating for those who have put a significant amount of money into the investment. Figure 1 shows the logarithm of the private property price index (PPI). While the PPI trended upwards in the long term, there were periods where property prices flatline for close to a decade (e.g. 1981-1989, 1998-2006, 2013-2020).

 Figure 1 Logarithm of the Private Residential Property Price Index, 1975-2022

Concentration Risk

Given the high capital requirement of property investment, most people are likely to have little left to diversify their exposure meaningfully into other assets, and thereby susceptible to high concentration risk. If the property fails to perform as expected, the investor could potentially lose a significant portion of their investment.

Dwindling price growth and cooling measures

Referring to Figure 1 again, which shows the PPI in logarithm scale that better reflects rate of change of the price index, we see that the price growth between 1975 and 2000 was much steeper at a compounded annual growth rate (CAGR) of about 9.5%, compared to the CAGR of around 3.4% from 2001 onwards. The slowdown in property price growth was in tandem with the slower economic growth as Singapore matured into a developed economy.

Further, the slew of property cooling measures since 2010 signals the government's determination to keep property prices in check.

Underneath the big numbers

Seeing big numbers are exciting. Sharing that you made $500k on your property investment carries much more swag than saying you made an 8% annualised return. But bear in mind that the large profits come from a large initial outlay. When assessed at an annualised rate basis, the property investment gains may not be as impressive as you think. Using the last 14 years as an example, the private property market grew from its 2009 trough at a CAGR of 4.6%, even if you factor in the leverage and IGNORE all the costs of investments, it is at most a 9-10% return p.a. (in reality, the average annualised return is likely lower than that based on a study by UrbanZoom). A very handsome return, but compared to the US stock market, the S&P500 index yielded a return of 13.2% return p.a. over the same period.

Given the points raised above, I'm not sold by the idea that property investment is as great as it is portrayed to be. It can still be a good investment vehicle, especially if you manage to get in at the right time and buy the right unit, but I'm personally not keen to tie up a huge chunk of my assets to property when there are so many alternatives with more manageable risks

The content shared in this post is just my opinion and should not be taken as financial advice. In fact, you should never treat what a random dude shared online as financial advice, no matter how credible he/she may sound.