Reality check for Singapore property as retirement asset

Homeowners can no longer expect their homes to generate the robust returns seen in previous decades, says a DBS report

Oct 18, 2021

IT IS often said that Singaporeans have an enduring love affair with property, with many looking to sell or downsize their homes to enhance their retirement kitties in their golden years.

But that passion for property is in for a reality check - and this is a good thing.

DBS' report Will property still be your pot of gold? sounds a strong note of caution that savers would be wise to heed - that homeowners can no longer expect their homes to generate the robust returns seen in previous decades.

The report's strongest message is that savers should diversify - that is, in addition to paying down their mortgage, they should have the discipline to invest regularly in a portfolio of stocks and bonds. A home is a big-ticket and illiquid item which inevitably comprises the majority of household assets. This makes diversification even more essential so that you have assets uncorrelated to the Singapore economy.

Homeowners would also be prudent to refrain from using too much of their Central Provident Fund (CPF) money to finance their property, as they do so at the expense of future retirement income. There are now online calculators, such as that rolled out by Endowus, to illustrate the potential growth of your CPF account with and without the use of funds for property.

In any case, CPF money earns a higher interest rate of 2.5 per cent for the Ordinary Account. To service a home loan, it makes more sense to use cash which earns practically nothing.

Funds in the Special and Retirement Accounts also earn between 4 and 6 per cent, which are rates far above the 0.9 and to 1.2 per cent annual returns from property in the period 2011-2021. Rather than count on rental income, for instance, savers should prioritise amounts in the CPF Life, which is by far the most attractive risk-free annuity in the market.

Based on DBS' analyses, the most recent decade of 2011-2021 was the most muted in price appreciation. Private property generated a compound annual growth rate of just 1 to 1.2 per cent, and 0.9 per cent for HDB resale. This reflected the impact of the cooling measures - around nine rounds since 2009. The golden period was 1991-2001, when private property rose between 6.8 and 7.7 per cent, and HDB resale by 11.1 per cent.

Demographic trends

Demographic trends are also a challenge as an ageing population and declining birth rates are expected to dampen price appreciation in the long term.

Of late despite the pandemic, demand has been buoyant. In September, however, sales of new private homes fell 31 per cent as the resurgence in Covid-19 cases forced tighter safe management measures. This was the second straight month of decline.



Still, Alice Tan, Knight Frank Singapore head of consultancy, is optimistic. "The fundamentals of residential property as a staple asset offering a 'roof over our heads' is substantially accentuated since Covid-19 started in 2020. Homes are now an essential sanctuary for living as well as work…

"Having seen how the demand trend has continued in the past and now in the present pandemic conditions, residential property will remain a sought-after endeavour from local and foreign homebuyers, as long as our economic expansion, population and household income growth continue over the long term,'' she says.

Prices of residential properties in many cities have risen in pandemic conditions. Based on the Knight Frank Global Residential Cities Index for Q2 2021, 38 per cent of the cities tracked posted double-digit annual price growth. Singapore ranked 73rd among 150 cities with a 7.1 per cent annual price growth.

Tan adds that the pandemic may also have triggered a "home buying imperative'' among individuals and families "who are now compelled into major life decisions, where in normal conditions would-be buyers might just have been content to wait and see''.

Lena Teng, MoneyOwl head of solutions, says the firm generally has two groups of clients. One group owns one property which they live in; this group sees their property as an asset for their retirement pot. The second group owns more than one property, and is more concerned about paying off their outstanding loan before retirement, "failing which, they will think about right-sizing instead''.

She says there are a number of considerations in advising clients on their approach to property investments. One is the degree of dependence on property as the sole source of retirement income. "Ultimately the potential capital appreciation from property or rental yield is subject to market forces and even regulatory changes. As such it should not be your safe retirement income floor. The foundation of one's retirement income should still come from more risk-free or stable assets like CPF Life or retirement income insurance plans that offer some guarantees.''

Ability to pay off mortgage

Other considerations are your ability to pay off the mortgage and the ease of maintaining a property in retirement. She says that typically property upgraders or investors seek to stretch out the loan tenure as long as possible. "It is only when they are approaching retirement or doing their sums to check if they can retire early, that they realise they have a problem with their outstanding loans. Paying it off will certainly affect how much resources are left for their retirement income, and they may also realise that their rental income (average of 2.5 to 3 per cent) turns out less than their monthly instalment.''

DBS offers a digital financial planning tool called DBS NAV Planner that incorporates spending and saving targets, planning for the home, and integration of multiple money streams, among others. It also recently launched a home equity income loan which enables you to borrow against a fully paid private residential property, to top up your CPF Retirement Sum for the CPF Life scheme.

DBS head of financial planning literacy Lorna Tan says financial planning is for everyone. But those with multiple responsibilities such as servicing mortgages and supporting parents and children will need more help. "It is important to keep a constant pulse on short and long term goals like financial freedom and have a comprehensive plan to navigate our journey.'' She says savers could start accumulating wealth early via "suitable investments"; build passive income streams by topping up their CPF and Supplementary Retirement Scheme (SRS) savings; and upskill to expand income opportunities via career progression and side hustles.

DBS' study throws up a number of useful insights:

- While the household balance sheet appears healthy, the report raises questions about affordability, as the pace at which home prices rise could outpace GDP and salary growth, "which raises the risk of froth building up in the property market''. Price-to-income ratios are also inching up to the higher end of 10-year averages. The report points out that with the recent strength of the property market, price-to-income ratios have increased to 12.2x for the median household and 6.9x for a household in the 80th income percentile in 2020. Over the past 20 years, price-to-income ratios for the median household ranged between 10.1x and 16.6x, while that of a household in the 80th income percentile ranged between 5.8x and 9.4x.

- Investment property is a relatively unattractive proposition. The cost of ownership of second property is as high as 15 per cent, due mainly to the buyer's stamp duty of 2.97 per cent and the additional buyer's stamp duty of 12 per cent.

- Hands down, historical equity returns beat that of property - and by a wide margin except for the Straits Times Index. DBS' analysis is based on the multiple on invested capital and takes into account leverage for property and cost of ownership.


Between 2009 and 2021, S&P500 and S-Reits showed the highest growth in invested capital, followed by private property (first property) and then HDB property (first property). For every S$100 invested, one received S$635 from S&P500 Index and S$486 from S-Reits, versus S$399 for a private property and S$339 for an HDB.

Investing in a second private property performed the worst, with a return of S$209 per S$100 invested. The analysis assumes a loan-to-value (LTV) ratio of 75 per cent. At lower LTVs, the returns look worse. Assuming LTV of 45 per cent, the multiple on invested capital falls to 2.09 to 2.21 times, making property the worst asset class.