Why property is not the stable nest egg it was before

DBS expects housing affordability to worsen.

DBS’ latest research report has found that investing in a property for retirement funds is not as financially stable as it was before. 

With property accounting for almost 42% of total household assets in Singapore, the investment originally strengthened with economic growth in its earlier years. 

Whilst earlier generations found this as an effective wealth accumulation strategy, DBS predicts that housing affordability is expected to worsen as work-from-home arrangements will force homeowners to trade up to a bigger home and price-to-income ratios will hit multi-year highs.

Derek Tan, Head of Property Research, DBS Bank, has said that this was due to shifting demographics in the industry. 

One of these factors include an uncertain outlook on the property market. Both the property price index (PPI) and HDB resale index saw increases at 7% and 11%, respectively, over the past year. This is despite the pandemic and the government’s hawkish stance on the property market.

A changing demographic is also set to affect the overall demand for homes. Factors such as an aging population and tighter manpower policies are set to affect the longer-term demand and expected rental yield for residential purposes. 

The research also points to an increase in property prices. Data has shown the pace currently outruns that in gross domestic product (GDP) and salary growth, with similar evidence being found in stretched affordability ratios over the recent years. In the past, this meant buying smaller homes with higher prices on a per square foot basis. Work-from-home arrangements, however, means there may be a shift towards bigger homes, with more households embracing dual incomes in order to attain more financial flexibility.

Specific groups of consumers also face challenges in housing affordability and retirement planning, as DBS data shows those with income up to $5,999/month and in the 30-49 age group were the most stretched. Those in this age group also showed the lowest propensity to invest. 

Private property owners in this age group experienced higher mortgage-to-income ratios. Thie 30-39  and 40-49 age groups had an average of 0.27, 19-46%, and 0.26, or 19%-39%, respectively.

High acquisition costs, according to DBS, also makes property less attractive. Instead, consumers should focus on growing their net worth with a diversified investment portfolio. Other asset classes will retain a more balanced investment strategy that can hold out longer for financial resilience. 

Lorna Tan, Head of Financial Planning Literacy, DBS Bank, also reiterated that financial planning goes beyond a strategy.

“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. Our multi-year journey to democratise access to wealth management services has allowed our customers to invest in non-property asset classes more conveniently and in a cost-effective manner through our suite of digital investing solutions, where we help them start earlier with less,” Tan said.