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Published November 13, 2006

Property outperforms stocks over several holding periods

For 10-yr holdings, property returns average 9.2% a year, stocks 6.4%


(SINGAPORE) Property has yielded better average returns than equities over different holding periods for the past 30 years in Singapore.

Between 1975 and the third quarter of this year, any 10-year holdings in properties returned an average 9.2 per cent a year, based on the URA residential property index.

This compares with an annual 6.4 per cent return for stocks, as measured by the Straits Times Index. In both cases, only capital appreciation is considered - not rents or dividends. The out-performance, excluding interest on bank loans, is also observed in three- and five-year holding periods.

Overall, most property owners would have seen their property values rising more than stock prices, except for those who went into the market during the aberrant overvalued years of 1994 to 1997.

Leong Sze Hian, president of the Society of Financial Services Professionals, said: 'Yes, historically in most countries, over a long horizon, property outperforms stocks. But the problem is, the down cycle in property is long and severe. In Singapore, compared with property prices 10 years ago, we are still down.'

Going by the URA residential property index, those who bought a property 10 years ago are still sitting on losses of some 30 per cent.

And in Japan, property prices are still 40 per cent down after the 14-year bear market, he said.

In Singapore, Mr Leong said the bulk of the recovery has so far been in the high-end segment. The slow growth in the mid-income group points to limited recovery in the mass market properties.

'Then you have the CPF cuts, and lower contributions to CPF for older workers and the rising interest rates. There are a lot of things going against the property market,' he said.

Meanwhile, there is a ticking time bomb in the form of the housing withdrawal limit imposed on CPF accounts. From Jan 1 this year, the withdrawal limit cap has been reduced to 132 per cent from 138 per cent of a property's valuation limit. This cap will be reduced by six percentage points every year to reach 120 per cent on Jan 1, 2008, to encourage prudence in using CPF savings to buy homes. As it is, Mr Leong noted, there has been reports of increasing default rates in the public housing market.

'I'm not comfortable that we are in a sustained property recovery.'

Mr Leong says he won't cast his vote on whether property or equities is better as an investment class as he advocates diversification. 'Already, most Singaporeans are over-exposed to properties, and only to Singapore properties at that,' he said.

Benny Ong, founding director of Life Planning Associates, said property investment is more risky because it requires a huge capital outlay. Then there is liquidity risk in that one can't sell the house immediately or to sell, say, 10 per cent holding in the house.

The continued ability to service the housing loan is also another risk.

'There is no low-risk investment in property,' he said. But having said that, he acknowledged that more people lost money in stocks than in property. 'Stocks are easy to trade, and people tend to gamble on it.'

Meanwhile, with the help of leverage or bank loans, property purchases can score big returns. For example, a 20 per cent increase in the selling price of a $800,000 property funded 80 per cent by loans would translate into a 100 per cent return for the investor.

Leverage, of course, cuts both ways. A 10 per cent decline in property price would mean a 50 per cent loss to the investor's capital.

Besides getting in at the right price, the risk in property investment depends on each individual's situation, said Mr Ong. 'It depends on the amount of loan you take, your cash flow situation, your ability to service the loan, your age. If you gear up to the max, you are exposed to bigger risks,' he said.

So after all that's been said, what is the current market view of Mr Ong, who has been through numerous property and stock market cycles? 'I don't see much risk in the property market in the next one year,' he says.