A new private property may no longer be “that pot of gold” that Singaporeans can solely rely on as their retirement nest egg, according to DBS’s latest NAV Financial Health Series research report, the third in this series.

Property is a major contributor to household wealth, accounting for nearly 42% of household assets in Singapore.

The asset has worked well so far as a strategy for older generations to grow their personal wealth. This is due to the value of homes and property investments having appreciated by multiple folds through the years.

See: Property prices may continue to rise for suburban condominiums: DBS

However, the strategy may no longer be sufficient or as cost-effective for younger Singaporeans today.

This is due to several factors, including property prices outpacing salary growth. Evolving home demographics have also weighed on price appreciation for homes.

According to DBS, the outlook of the property market “remains uncertain” given the more modest property price growth in recent decades.

“While there has been a recent upswing in buyer sentiment – driven by upgraders –, the bank remains watchful of the pace of increase in the private property price index (PPI) and HDB resale index, both of which rose approximately 7% and 11% respectively over the past year despite the pandemic and the government’s continued hawkish stance on the property market,” says the bank.

Singapore’s changing demographics such as an ageing population and tighter manpower policies are also a factor in terms of relying on a second property as an investment vehicle.

This is because the aforementioned factors may weigh on the longer-term demand and expected rental yield for residential properties, notes the bank.

“One should also keep in mind potential prudential measures that could be further implemented by the Singapore government, given their hawkish stance as property prices continue to climb, and as part of efforts to mitigate the ‘lottery effect’ of public housing in mature townships,” says DBS.

The increase in property prices, which has gone beyond the growth of salaries, has highlighted the sustainability of the heightening property prices and its implications on overall housing affordability.

“Data has shown the pace of increase in property prices currently outpace that of gross domestic product (GDP) and salary growth, which raises the risk of froth building up in the property market,” reports the bank.

To this end, DBS has found evidence of stretched affordability ratios in recent homes. For instance, upgraders were noted to have bought smaller homes while paying higher prices on a psf basis.

That said, there may be a shift in preference towards bigger homes due to the work from home arrangements brought about by the Covid-19 pandemic.

“This is commensurate with the observation that more households are turning to dual incomes in order to achieve greater financial flexibility,” observes the bank.

Housing affordability, based on median mortgage-to-income ratios, tends to be the most stretched among those who are earning up to $5,999 per month and within the 30 to 49 age bracket.

Customers within this age group are found to have the lowest propensity to invest.

“Private property owners in the 30-39 and 40-49 age groups were found to have higher mortgage-to-income ratios at an average of 0.27 (27%) (ranging between 19-46%) and 0.26 (26%) (ranging between 19-39%) respectively,” says DBS.

“These age groups are also most likely to be experiencing a peak in their financial commitments, given priorities such as having to care for their children and provide for their elderly parents at the same time, or upgrading to a new and bigger home etc,” it adds.

As mortgage payments make the most of the household’s monthly recurring expenses, it was found that these particular groups may have difficulty planning for their retirement.

“By studying publicly available data, as well as aggregated and anonymised data insights from 1.2 million of our retail customers, we were able to diagnose that one’s ability to retire well would be negatively impacted if one adheres to the adage of property being a ‘golden nest egg’ given shifting demographics,” says Derek Tan, head of property research at DBS.

“Instead, we found several investment alternatives which have comparable, if not superior, returns that a retail investor can consider as part of maintaining a well-diversified investment portfolio,” Tan adds.

As such, DBS recommends retail investors to consider alternative investment asset classes which have “comparable – if not superior – returns when planning for retirement”.

“While property may remain a core part of their portfolios, with a caveat that the power of leverage serves as a double-edged sword for property investments, the inclusion of other asset classes – for example, equities, real estate investment trusts (REITs), and more – will form a more balanced investment strategy that can go a longer way to achieving financial resilience,” says the bank.

The S&P500 and S-REITs were found to have shown the highest growth in invested capital, followed by property assets.

Specifically, for every $100 invested, an investor will receive returns of around $635 from the S&P500 index, $486 from S-REITs, compared to the $399 and $339 from investing in a private property or HDB flat respectively.

Contrary to popular belief, investing in a second private property showed the weakest performance with a return of $209 per $100 invested. This is due to lower loan-to-value (LTV) ratio and higher acquisition costs such as the additional buyer’s stamp duty (ABSD).

For more stories about where the money flows, click here for our Capital section

Homeowners should also be cautious about employing leverage to bump up their investment property returns, warns DBS.

“Additional leverage would expose them to greater mortgage obligations and financing risks given the interest rate environment is not within their control,” it says.

Lorna Tan, head of financial planning literacy at DBS Bank recommends that customers regard their primary property as a retirement asset.

She adds that investors “should keep in mind that diversification is key and the right mix of assets can help to maximise the risk-reward from their investments”.

“Our multi-year journey to democratise access to wealth management services has allowed our customers to invest in non-property asset classes more conveniently and in a cost-effective manner through our suite of digital investing solutions, where we help them start earlier with less.”

Photo: Samuel Isaac Chua/The Edge Singapore