It's April 1st as I write this. I originally intended to write this earlier, but I was occupied, and frankly - a little emotional. One of my good friends recently inherited a large amount of money. It seems that the financial decision is leaning towards using the majority of it on a new property. In both Estate and Financial Planning, especially if you already own an existing property - this makes it exceptionally rough where you set yourself up for a ton of missed opportunity.
I usually don't have anything against property specifically, although it's just math to me. Property has had an extremely good history in Singapore but is limited to the pre-2000s era, now experiencing a gradual decline in terms of ROI. Conversely, stock-based investments a significantly better long term global history. (This is not to be confused with the idea that property is declining in price. rather, it appreciates less than it did before (e.g. 16% annualized returns now closer to 5% annualized returns). To back such statements, here is some evidence.
1) TAXES AND REGULATION
The government is also far more involved in the regulation of property than most other investment sectors. Some of the differences are outlined as such just on the tax end alone:
Residential Property | Stock-Based Investments | |
Capital Gains Tax/Withholding Tax | SSD (potentially) | NA |
Purchasing Tax | BSD | NA |
Additional Purchasing Tax | ABSD | NA |
Rental/Dividend Tax | Rental Tax | NA |
You might argue that these conditions have always been there and as such, is not ample evidence to prove that property would be harder to make money on.
As just one example, ABSD on a 3rd property for a local has increased from 3% to 30% in the last 12 years alone. It diminishes resale value/options, which also slows down the rate of transactions and leads to a...
2) Reduced Average Appreciation:
Using data on Residential Property from PPIS (Property Price Index Singapore), we can see this quite clearly. At a glance, it seems that property is always going up, as it should.
When we take a closer look, from 1975 to 1995, the market appreciated from 8.9 points to 117.9 points. That's a return of slightly under 13.8% annualized across a 20-year period - a ridiculous and extremely competitive return.
But from 1993 to 2023, 58.3 points to 201.5 points. That is an annualized return of 4.3%.
For context, the difference in the two is SO VAST that if you had invested $100,000 in property for 20 years in 1975, you would have a little more than $1,326,900.
If you invested $100,000 in 1993 or somewhat anytime in the last 30 years instead, your return was closer to $353,620 for the same duration- almost a $1million difference for EVERY $100,000 invested in property.
Property is still always 'going up', and I'm not disputing that. My point is that property is 'going up' at a much slower rate than it used to, even with slight variances in the timing of entry - and you could be very disappointed if you are expecting huge returns.
It would be a huge mistake to believe that property would continue to appreciate like how it did in the early days.
3) Weakening Leverage
The main driving factor for higher ROI in property is leverage, which is being also being gradually eliminated by an increasing potential regulation in your loan size (e.g. for HDBs) and persistently high interest rates in the last 2 years.
Interest rates during this period are an exceptional factor. I have had clients who are refinancing their properties now and are not loving the process at all.
While it is expected that interest rates from banks would fluctuate naturally, new property owners looking to flip a fully developed property would have an exceptionally awful time.
You can see that for every 0.3% interest that exists, your potential ROI drops by almost double that. That is a ridiculous correlation.
The table already demonstrates extremely optimal scenarios with a 20% appreciation (based on Singstats, Condominium average appreciation after 4 years), and all interest rates being in extremely favorable situations.
Even the worst interest rate is the 3.15% fixed interest rate for 3 years being offered by OCBC, whereas the best rate @2.85% is not by a major bank and only for 2 years.
Yet you can see that for every 0.1% of interest incurred, you actually lose almost twice as much in interest for your ROI - while frankly it's not like a 7.8% is a particularly impressive return to begin with.
On the Stock Portfolio End:
In the last 4 years, the fund has performed at 19.25%. Of course, with such high fluctuation, achieving such an annualized return in the long term is unrealistic. So we'll cut it down by half. In any case, if you google, 'average market return' this is what you'll get - and it's not like you have to settle for average.
But since we used Singstats to estimate average condo appreciation, we should compare it against average market appreciation.
At a 9.625% annualized return, while contributing the capital outlay and a lower 'monthly mortgage' of $2700, you get this instead:
20% gain in 4 years, Condo | New Property Owner@2% Interest(Expected Long Term Financing Interest Rate) | Investment Portfolio 9.625% |
Gross Return | $1,200,000 | $1,200,000 |
Monthly Mortgage | $2772/mth | $2700/mth |
Capital Outlay (minimum) | 4 years mortgage payments + Downpayments + BSD = $24,600 + $133,056 + $250,000 = $407,656 | 4 years ‘mortgage payments’ + Downpayments + BSD = $24,600 + $129,600 + $250,000 = $404,200 |
Outstanding Loan | $674,001 | NA |
Net Return | $1,200,000 - $674,001 = $526,000 (rounded up) | $552,800 (rounded down) |
Annualized Return on Capital Outlay | <7.8% | 9.625% |
In a nutshell, you’d get $26,800 more for $3,456 less even if you use an average stock market return against an above-average property scenario of 2% interest.
But what if the property investment couldn’t be made due to wanting to sell the old house to avoid ABSD? Assuming it took 2 years to sell the house, the numbers now look like this:
20% gain in 6 years, Condo | New Property Owner@2% Interest(Expected Long Term Financing Interest Rate) | Investment Portfolio 9.625% |
Gross Return | $1,200,000 | $1,200,000 |
Monthly Mortgage | $2772/mth | $2700/mth |
Capital Outlay (minimum) | 4 years mortgage payments + Downpayments + BSD = $24,600 + $133,056 + $250,000 = $407,656 | 2 years compounding on capital, followed by, 4 years ‘mortgage payments’ + Downpayments + BSD = $24,600 + $129,600 + $250,000 = $404,200 |
Outstanding Loan | $674,001 | NA |
Net Return | $1,200,000 - $674,001 = $526,000 (rounded up) | $633,830 (rounded down) |
Annualized Return on Capital Outlay | <7.8% | 9.625% |
The difference now becomes a small 6 figure sum even if the property investment is executed perfectly without incurring any kinds of additional fees such lawyer fees and agent fees.
And this is just on using a capital amount that is technically under $420,000 - the difference becomes pronounced if the potential capital available is $1.3mil where every year, the opportunity cost to my client is around $50,000.
That’s more than his current monthly salary, and that's the opportunity cost to my friend for waiting on a property purchase before considering a long-term investment.
The price of the fund is $21.48 as of the 1st of April. We'll continue to update if the opportunity cost really plays out like I think it will, or at least to any degree.
UPDATE: Work kept me busy to publish this late, but the fund is now 23.26 as of June 15 - up another 8.26% in just the last 2 and a half months alone.
Closing Thoughts
I am aware that my assessment is not absolute. But the probability is high from the get-go and becomes an exponentially higher probability over time.
At a certain point, a high probability becomes a fact. [If you didn't know, a fact is defined in statistics as a hypothesis repeatedly tested that arrives as a reality after consistent statistically significance] Which to be fair, the sun revolving around the earth was also a fact once, but I digress...
What's more important to me is the meaning behind the opportunity cost.
Well-meaning intention has very little bearing on the eventual outcome. I say this despite knowing not every single client I've ever had have made money yet. It is just a statistical approach based on the most likely outcome.
Instead of taking a wait and see approach especially with dwindling interest, you should budget aside what is appropriate for a property, renovation, loan and another safety budget, then use the rest of the money to prevent inflation.
To willingly choose financial depreciation or inflation instead is foolhardy and meaningless. It is lack of knowledge and conviction to execute, that costs someone else money.
What if it was you? What if you failed to get what you desired in life due to poor investment considerations? Think about it.
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