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Thread: Property may no longer be pot of gold for retirement, says DBS

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    Default Property may no longer be pot of gold for retirement, says DBS

    Property may no longer be pot of gold for retirement, says DBS

    Oct 12, 2021

    PROPERTY has been a golden wealth accumulation strategy for earlier generations of homeowners, as many have seen the value of their homes and property investments grow by multiple folds over the years.

    But what may have worked for the older folks may no longer be sufficient nor cost-effective for younger Singaporeans working towards a comfortable retirement, latest research from DBS showed.

    Several factors - such as prices potentially outpacing one's salary growth and evolving demographics - now weigh on home price appreciation, challenging its longstanding status as a key retirement asset.

    Historically, income growth had generally kept pace with property price increases. But in the past five years, income growth has slowed to 1.2 per cent (median income) and 1.7 per cent (80th percentile) - one of the lowest growth rates in 20 years - while property prices rose at a faster pace of 2.1 per cent.

    "A property market is healthy if it is supported by income growth. But for most of us, it is starting to get unaffordable," said DBS head of property research Derek Tan at a media briefing on Tuesday (Oct 12).

    Data from the bank showed stretched affordability ratios in recent years, with upgraders buying smaller homes while paying higher prices. Since 2010, average home sizes have declined 20 per cent, while average price per square foot jumped by 50 per cent.

    As work-from-home trends normalise amid Covid-19, there may be a shift in preference towards bigger homes which would further stretch affordability, said Tan.

    Considering a like-for-like property upgrade today, price-to-income ratios are estimated to rise to almost 15 times for the median household, and 8.3 times for a household in the 80th income percentile.

    "These numbers have never been seen before ... the highest in 20 years. This means current prices are not sustainable unless we start to see salaries increase at a faster rate," said Tan, noting that it also implies households increasingly need to be dual-income.

    This is particularly concerning for the middle-aged segment. DBS data found that private property owners in the 30-39 and 40-49 age groups were found to have higher mortgage-to-income ratios.

    They are also most likely to be experiencing a peak in their financial commitments, given priorities such as raising children and providing for their parents at the same time, or upgrading to new and bigger homes.

    To add, a 20 per cent drop in income will drive mortgage servicing ratios up by 5-9 per cent, causing significant financial stress on households.

    With mortgage payments typically making up the largest component of a household's monthly recurring expense, the ability for these groups of customers to plan for their retirement is negatively impacted, said DBS.

    Due to cooling measures, property market returns are no longer as attractive as before, especially for buyers who bought during major cyclical troughs.



    Looking at the returns of different asset classes since Q1 2009, the S&P 500 and Singapore real estate investment trusts (S-Reits) recorded the highest growth in invested capital, followed by property assets.

    For every S$100 invested, one can expect returns of S$635 from the S&P 500 and S$486 from S-Reits, compared to S$399 and S$339 respectively from a first private property or HDB flat.

    Singaporean buyers considering a second residential property should also note the fees incurred, mostly from additional buyer stamp duty.

    As an example, total estimated one-off costs for a second property worth S$1.5 million come up to S$227,350 or 15 per cent of the total price. This compares to equity transaction costs of just 0.38 per cent.

    "Most people say the cost of ownership is justified because of the beauty of leverage. But at this point, investment in property would incur close to 15 per cent of the price in taxes that you can't get back. The key question to ask is if you would take a similar mindset to buy stocks," said Tan.

    Over the longer term, Singapore's changing demographics amid an ageing population and tighter manpower policies may weigh on demand and expected rental yield for residential properties.

    Individuals should keep in mind potential measures that could be further implemented by the government given its hawkish stance as property prices continue to climb, and as part of efforts to mitigate the "lottery effect" of public housing in mature townships, said DBS.

    Clearly, relying on property assets alone is no longer enough to attain one's financial goals. Other asset classes such as equities and Reits should be considered to build a more diversified retirement nest egg.

    Based on SingStat data, about 42 per cent of Singapore household sector assets still lie in property due to low propensity to invest, with shares and securities making up a mere 9 per cent.

    "While consumers can regard their primary property as a retirement asset and a component of a holistic financial plan, they should keep in mind that diversification is key and the right mix of assets can help to maximise the risk-reward from their investments," said Lorna Tan, DBS head of financial planning literacy.

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    Default Re: Property may no longer be pot of gold for retirement, says DBS

    https://condosingapore.com/showthrea...t-for-everyone

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