Is property still a good retirement investment?

Private home prices fell for the third straight year, declining by 3% in 2016, this is according to Straits Times.

Everyone thinks that investing in property is not a great idea currently. Many property agents have also quit in masses because they are unable to close. Existing property agents are also demoralised. I referred a few cases to property agents as my clients want to buy properties after doing financial planning with me. ALL the property agents I referred to appeared to be so demoralised that they think 101% they cannot close. They seem to have totally lost their salesmanship. They give up on the first objection raised. One of the property agent even gave up immediately when my client did not pick up his first call. My client didn’t pick up the call because he was working! This is such a sad state of affair in the market.

So I told my clients to just DIY and search themselves from the property portal.

But the question is this: when is a good time to buy property? As the saying goes, you can only make money by buying low and selling high. Will there be opportunities to buy low? Will there be opportunities to make a capital gain?

I got a bad feeling that property investment is not going to be that great for the next few decades. Here are my reasons:

Changing demographics

Due to aging population, Singapore will see a large number of older people. In year 2030, it was projected that 1 in 4 Singapore citizens will be age 65 and above. This is in contrasts to the current 1 in 8 in year 2015.  (Source: Older Singaporeans to double by 2030).

Many Singaporeans are asset rich but cash poor. This means they have to unload and sell their properties when they are in retirement age. In view of the aging population, there will be a long-term downward pressure in property prices as the proportion of retirees who want to monetize their property increases. In other words, there will be more and more sellers than buyers in the future.

Falling in love with properties

Asian tends to fall in love with their properties. I have met countless clients in this situation. Despite having insufficient liquidity, many of them refused to sell and downgrade their million dollar properties say to 4-room flats (You don’t need to have a very big property to retire). They entered the property market at the right time and now they have a windfall. But the problem is they are not letting it go.

They have to work another 100 years because their liquid assets are so little – typically just a few hundred thousands of dollars.

If they downgrade their properties now, they can retire and enjoy life.

A few weeks ago, I met a client who asked me to quote an annuity for her SRS of just $36,000. After I quoted her, she got angry at me as the payout a month is as good as zero. This is the problem with some of these clients. They want financial planners to be a magician. $36,000 cannot even last a person for one year, how is it going to last for a life time? The sad part is that after setting aside the cash she has for her children’s education, the only asset she has is the property worth a whopping $3m. But she said selling it is non-negotiable. Hence, she is actually poorer than a fresh graduate from school.

I don’t know about you, but life is short and if you do not enjoy the fruits of your labour now, you may not have a chance. What is the use of dying rich but living like a poor man? Can anyone bring their possessions to the other side of the world? Lesson: do not be married to your property, your property is not a good spouse!

By the way, the problem of being asset rich but cash poor has already started to show its problems as there were reports of retirees sitting on million dollars properties asking for government assistance (“Asset-rich, cash-poor retirees speak up”, 30 November 2013).

Asset-rich, cash poor problem is a result of poor financial literacy

I quote the relevant part of the same newspaper article:

Professor Benedict Koh, director of the Singapore Management University's Centre for Silver Security, says the asset-rich, cash-poor phenomenon is an outcome of over-investment in property. And the proportion of such seniors is only going to rise as the population ages, say Prof Koh and other observers.

Ms Peh Kim Choo, director of Hua Mei Centre for Successful Ageing, is worried that the asset-rich, cash-poor problem will be exacerbated as baby-boomers retire over the next 20 years.

Observers say greater financial literacy and education is needed. "I don't think anyone really knows how much we really need to grow old," says Ms Peh.

Risk-adjusted return maybe negative for properties

One of the common mistake people make is to focus on returns but neglect the risk. What is important is the risk-adjusted return. As far as property is concerned, the risks are:

• Interest rate risk. This is the risk of property prices declining as a result of increasing interest rates.
• Liquidity risk. This refers to not able to buy or sell a property because opportunities are limited. Liquidity risk is the highest form of risk for properties.
• Market risk. This is the risk that affects the entire property market.
• Social/Political/legislative risk. In Singapore’s context, it is the government’s goal to stabilize the property market. In the light of this, property market is not a free market. Hence, cooling measures are introduced by the government to ensure that happens.

Given that people tend to fall in love and hold on to their property like a married couple, any price appreciation is irrelevant since they refused to sell it until they are desperate. In any case, it is likely prices will be subject to downward pressure as the population age.

So, we can only focus on rental income. Currently rental income is around 2% after taking into consideration of maintenance, mortgage loan interest rates, tenants destroying furniture, taxes and property agents’ fees. With this type of yield, it is entirely not worth it. Money market instrument with significantly lower risk is already yielding more than 2% and there is no headache, no liquidly risk too (you can sell by giving one working day notice).

Increase in foreigners will not be significantly higher

Almost all the demand in the rental market is from foreigners. No Singaporeans will want to rent a property when they can just buy one and pay the mortgage instead of paying rental.

Thus, rental income is highly dependent on the number of foreigners in Singapore. Rental income in turn has a significant effect on property prices since the value of a property is the discounted cash flow of the rental income.

However, Singaporeans have already made it loud and clear that they do not want too many foreigners. So, the demand for rental is not going to go up and up like a superman.

See ESM Goh pleased S'poreans debating population issue.

Conclusions

I do not think property is a good investment. In fact, it is a very dangerous investment especially for the average joe who would tend to have a very large exposure to property due to the average joe’s very average networth.

I personally do not recommend the usage of property if one's networth and/or salary is just average.

But if a person is a high networth, property asset can be one of the asset class in a diversified portfolio. Still, the investment in property tends to be highly concentrated unless you are an ultra high networth.

The average joe should not pretend to be like an ultra high networth.

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