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Purchasing a second private residential property was formerly thought to be the greatest method for Singaporeans to build wealth and earn high investment returns. The prevailing thinking has been flipped on its head by a DBS study published on Tuesday (Oct 12).

Among a variety of investment choices, researchers at the Singapore bank discovered that purchasing a second home produced the lowest increase over the last decade or so.

They compared the performance of eight different asset classes from the first quarter of 2009 to the same period in 2021, and discovered that investing in the S&P 500 — a stock market index in the United States that tracks 500 large publicly traded companies — provided the best returns, yielding S$635 for every S$100 invested.

Then came Singapore real estate investment trusts (Reits), which returned S$486 per unit, and an individual's first private home, which cost S$399. Reits are real estate investment trusts that invest in a portfolio of properties and pay out monthly payments to investors, comparable to dividends.

With a return of S$339, a person's first Housing and Development Board (HDB) apartment came in fourth place.

“Our results indicate that after one's first house, real estate becomes less appealing as an asset class. "Investing in an extra property may not be the best option if you are trying to build your nest egg for retirement," according to the DBS study.

Due to the numerous taxes that must be paid, such as the Additional Buyer's Stamp Duty, current property cooling measures also imply that investors seeking to buy their second private home will have to pay a lot of money (ABSD).

An investor purchasing a S$1.5 million second home, for example, would be required to pay approximately 15% of the property price in taxes.

"The important thing to ask is: If you were to adopt a similar mentality and purchase a stock knowing it would be down 15% tomorrow, would you buy now or tomorrow?" DBS property analyst Derek Tan asked in a media conference on Tuesday. Most people, I believe, will say they will wait a few days.

"As a result, I believe that many individuals are adopting the golden rule that property in Singapore is always a winner rather than taking a logical approach."

Apart from the lower returns, DBS advised purchasers to consider the fact that, owing to the large capital needed, there would be less opportunity to diversify one's portfolio and that property is less liquid than other investments. To manage renters and maintain the property, more time and effort is required.

Property values, unlike other asset classes, tend to fall more severely during economic downturns, with the exception of the Covid-19 epidemic, particularly when residential unemployment rates reach 4%, according to the study. And it's during these downturns that liquidity is most important.

Lower Returns

Although property has usually been a stable asset class with reduced volatility, the profits from investing in one, whether in a private condominium or a HDB apartment, have decreased in recent years compared to the early 1990s owing to a slower pace of price rise.

According to government price indexes, the Singapore property market grew at a compound annual growth rate of 5.9% between 1991 and 2011, before dropping to 1.1 percent in the past decade.

"With more moderate price rise in recent decades, it is uncertain whether the investing approach that worked for our parents in the past would continue to work for us in the future," the DBS study said.

The implementation of various cooling measures over the years, such as the Seller's Stamp Duty, loan-to-value restrictions, and the ABSD, may be partially blamed for the halt in property price rises.

With low birth rates and an aging population, the study predicts that Singapore's population will begin to decrease in 2030, resulting in a drop in future housing demand and a long-term impact on property prices.

Diversification is Required

According to statistics from the Department of Statistics, Singaporean families have 42 percent of their assets tied up in property, whereas the comparable number for more developed economies such as the United States is about 30 to 35 percent, according to Mr Tan.

In Singapore, shares and securities account for just 9% of household assets, according to the DBS study, which is "extremely low."

People aged 35 to 54 were found to have the lowest inclination to invest.

This is in line with another finding that individuals aged 30 to 49 had greater mortgage-to-income ratios, indicating that many people are putting their funds away to pay their mortgage obligations rather than investing or saving for retirement.

"As our results indicate, depending only on physical assets may no longer be adequate to meet our financial objectives." To create a strong nest egg, it is critical to explore diverse sources of returns across various asset types such as stocks, REITs, and more," the bank said.

Mr Tan said that although stocks are more volatile, the rewards are greater and they tend to correlate closely with the economy's performance.

"Over time, if one adopts the same mentality as when investing in real estate and takes a long-term perspective, one may get better returns than when investing in real estate," he said.

The results in the DBS study are fair, according to Mr Nicholas Mak, director of research and consulting at property firm ERA.

Property investing, he added, is still feasible for those who can do so within their means while still having adequate investable assets for other kinds of investments.

"A person's family income should not be stretched merely to invest in a second home. However, there are also grounds for those who can afford it. Because it's a more stable (asset type), they can still purchase a second home."

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