For a long time now, property has been one of the best investments that one could make in Singapore. As Prime Minister Lee Hsien Loong has said, the government has long pursued home ownership as a key national policy, giving Singaporeans "a stake in the country" and enabling "every Singaporean to share in our economic growth".
And what economic growth that has been. As Singapore journeyed from third world to first, its GDP per capita (accounting for purchasing power parity, or PPP) for 2023 of USD 87,885 is today the fifth highest in the world, and tops the ranks in Asia.
A dollar invested in property in 1975 is worth roughly 22 times that in 2023, 48 years later.
But this is 2023, and not 1975. Is Singapore property still a good investment today?
Are the Best Years for Singapore Property Behind Us?
The stellar past growth of the property market is sometimes touted as a reason to keep investing more in property. The 22x return mentioned above is roughly 6.6% annualised - well above our general CPF interest of 2.5% on monies in the Ordinary Account and 4% in the Special and Medisave Accounts.
According to data from the Singapore Department of Statistics, per capita GDP was SGD 5,755 in 1974 and reached SGD 114,165 in its latest reported data for 2022. In annualised terms, per capita GDP growth of 6.4% almost matched the real estate market returns.
The long-term link / correlation between per capita GDP and real estate price performance is actually well-documented in many economies and studies, and intuitively, it makes sense. Money has to be earned by an individual to buy a home, and income is largely captured by per capita GDP with few adjustments. Prices rise on the demand from these individuals as they purchase homes with their increased wealth. Studies in Asia, Europe, and the US reveal that the correlation between median home prices and GDP per capita is up to 60 - 95%.
However, we can go from third world to first, once. In general, as economies become more developed, economic growth stabilises at lower levels. This is because of the larger "base". There are also more "low-hanging fruits" for developing countries - for example, they can drive a good amount of growth by replicating technologies and production methods (even older/cheaper versions of such) of developed countries.
We can see quite clearly in the chart above that per capita GDP growth has indeed generally slowed in Singapore. From the double-digit annual growth up to the 1980s, to high single-digit growth up to the late 1990s prior to the Asian Financial Crisis, growth has further slowed to mid- or low- single-digit growth since. Per capita GDP growth in nominal terms did show a strong uptick in 2021 and 2022, partly on rebound off a low base in 2020 (effect of the COVID-19 pandemic), as well as higher inflation.
Furthermore, the Singapore government has, over the past decade or so, seemed quite focused on keeping a lid on property price growth.
Following the Global Financial Crisis (GFC), home prices in Singapore rebounded quickly, rising over 60% from mid-2009 to its 2013 peak. In response, the Singapore government imposed successive and increasingly tough measures on buying, selling, and financing. These included the introduction of the seller's stamp duty (SSD) in 2010, an additional buyer's stamp duty (ABSD) in 2011, as well as limits on the proportion of an individual's income that could be used to service loans in 2013. Most recently in April 2023, ABSD for foreigners was doubled to a hefty 60%!
Long gone are the days of flipping properties for quick gains!
If Singapore Property Returns Are Going To Be Lower, How About Other Forms of Investments?
Are there alternatives that would give us higher returns, stocks perhaps? Using the S&P 500 as a market proxy (as Singapore's Straits Times Index has a shorter history and also saw major overhauls during the period under review), stocks have returned an impressive annualised 8.7% growth from end-1974 to end-2022.
Over the longer term, stocks can indeed provide superior price performance (*unlevered, a point which we will explain later) to property. The flipside of this - higher risk and volatility.
Singapore has had 4 major recessions since independence. A summary of these events, and the impact on the local stock and property markets (peak-to-trough declines):
Asian Financial Crisis
Global Financial Crisis
(Source: The InvestQuest, URA, Realvestor)
This demonstrates the higher risk and volatility of stocks versus property. For many investors and pundits, a major market downturn might cause them to sell at least some of the stocks in their portfolio. What would lead you to sell your property, particularly if you were staying in it?
How about something "safer", like gold? According to data from gold.org, the price of gold has risen from USD183.85/oz as of end-1974 to USD1,813.75/oz as of end-2022, for an annualized return of 4.9% over the period. The return may not have been as high as stocks or property, but gold still can have a position in your portfolio. Gold is frequently used as a diversifier in portfolios, given its low correlation with other asset classes like stocks or bonds.
The World Looks Messy Now, And Interest Rates Are High. Should I Keep My Money In Cash Instead?
Buyers certainly have many worries about buying property today. The Russia-Ukraine war began in February-2022 on Russian President Putin's announcement of a "special military operation", and is now almost two years old. After attacks by Hamas last month in October-2023, we now have the Israel-Hamas conflict in Gaza threatening to spill over into a much wider conflict.
Lessons from past geopolitical crises suggest that markets shake off geopolitical risks quickly. Stock and property markets may decline, but the impact may be short-lived. Indeed, if you believe in a WWIII scenario, "the last thing you would want to do is hold money", warns billionaire investor Warren Buffet. (Read more in related article - "Crisis in Ukraine: What is the impact on Singapore property?")
One thing that is quite different versus two years ago is interest rates. In response to higher inflation, the Fed has very aggressively hiked rates to tame inflation.
As a result, mortgage rates in Singapore have also risen significantly. In late-2022, some banks even temporarily stopped offering fixed rate home loans - possibly as they too had little visibility on where rates were going. In January-2023, fixed rate home loans offered by Singapore banks hit a peak of 4.25%. They have since come off; the latest fixed rates stand at around 2.95% (do contact us if you need more information on rates).
Still, interest rates do remain high relative to even recent history, and buyers may be worried about further unexpected hikes in interest rates.
It is indeed hard to predict how interest rates will move. In September-2022, the MAS raised the stress-test interest rate by 0.5% to 4.0% - this stress-test interest rate is the rate that the banks should use to compute the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) as they disburse loans to borrowers. Some banks have gone even further, using rates of 4.5 - 4.7% in their computations
The upside of this is overall better mortgage loan "quality" in our banking and property markets. One must be able to service the "stress" from higher interest rates, to qualify for the requested loan. Buyers who do not wish to over-extend themselves and are fearful of higher rates should certainly test their own ability to service a potential mortgage loan based on their expectations or fears of where interest rates could go.
The current high interest rate environment does present some opportunities for the more risk-adverse of us. One easy and cheap way to get higher returns with almost negligible risk (being backed by the Singapore Government) is to invest in instruments such as T-Bills and Singapore Savings Bonds. Yields on the most recent tranches of 6-month and 1-year T-Bills were 3.95% and 3.7% respectively, and November's Singapore Savings Bonds will provide an average annual return of 3.4% over 10-years.
Price growth of Singapore real estate should certainly slow, given that Singapore is by now very much a developed economy with high per capita GDP. Alternatives such as stocks can provide better price growth, albeit with higher risk and volatility. Others like gold and fixed income instruments can also be considered as part of your portfolio.
How you can get more out of (even if lower) property price growth - leverage. Leverage may really not be advisable in markets such as stock markets where prices are volatile and you may easily unexpectedly have to "close out" your position, unless you are a seasoned trader. It can be a good strategy to employ in the property market (if you agree that property prices should have lower growth, but be more stable with lower volatility). We will go deeper into the math and calculation of returns in a future article.
Overall, what is important is to take well into account your own situation, expertise, and views in constructing your personal portfolio. Its often said: "it's not about timing the market, but about time in the market". Talk to your financial adviser and/or real estate agent today!
About the Author
In her former life as an equity analyst, Evon analyzed companies and stocks to find the best ones for her investors to put their money in, with over a decade of consistent outperformance. Now as a realtor, she enjoys using her analytical skills to help her client secure the best properties to invest in, and finds the greatest joy in journeying with clients towards their dream homes and ideal units.
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