As you may have heard, the retirement age was raised to 63 years old earlier this month. Yet, this should not come as a shock since the amended Retirement and Re-employment Act will eventually push the retirement age to 65 by the end of this decade. With the fear of toiling for your retirement, you may have given some (or much) thought to how you can afford your golden years without the blood, sweat and tears of labour.
Property investment alleviates some of that burden from slogging your senior years away. However, many often allude “property investment” as merely a second property venture, where one reaps its rental yields or long-term value. This tunnel vision may have worked for generations before, but unfortunately is getting too idealistic in the current real estate market.
Not only have property prices reached an all time high, but prospective tenants have also fallen. In such a market, perhaps a second property venture may no longer be the bee’s knees. So then, how do you prepare for your retirement with real estate?
This article will explore the viability of owning a second property in the current real estate market and what other options you can consider to support your golden years in comfort.
Should You Own a Second Property?
For many, our house is probably where we invest most of our money. In fact, for most homeowners in Singapore, our property alone makes up about 42% of our total assets, and this percentage is only expected to rise in the current market.
Real estate prices have been appreciating at a higher rate in recent years, partly due to expensive land costs and partly due to a compelling demand. The strong desire to obtain a property is not without reason; real estate essentially helps hedge your money against inflation since land is so extremely scarce in Singapore. Couple the land insufficiency with our strong economic growth, property prices have only north to shoot. Yet, as much as this upward trend is attractive, it can also disillusionise some…
Worrisome Price-to-Income Ratio
Don’t get us wrong, strong economic growth is good, however too strong of an economic growth may not be ideal if you intend to buy another property (unless you already have the income capacity to do so). With reference to the chart above, we can see a directly proportional relationship between GDP and property prices. That means a slower economic growth tends to weigh on real estate prices, and conversely, a robust economic growth leads to a spike in property prices.
Despite the pandemic, Singapore’s economy has been resilient and is only set to pick up its pace of growth in the coming years. Couple the economic growth with the continued strong demand from BTOs delay and upgraders, real estate prices are set to rise.
The flames of high prices is furter fanned by a slow increase in income. In our previous article, we analysed the price-to-income ratio of Singapore’s property market to investigate the possibility of a housing bubble in Singapore. Unsurprisingly, we concluded that, without adequate regulation from the government, housing prices would eventually outpace income growth.
A price-to-income ratio essentially measures the long-term affordability of homes based on price and income. A high ratio means you likely have to stretch your finances to attain the property you want. Expectedly, the price-to-income ratio for non-landed private residences has increased from 14.7 in 2019 to 15.4 in 2020.
With the current pace of growth, a second property may get less and less affordable and hence less likely to finance your retirement. The “buy low, sell high” strategy may have worked generations before, but perhaps not anymore. So then, what are the other options to support your retirement comfort?
What are your Options?
With a second property, your retirement funds are reliant on capital appreciation or rental yields, which is extremely uncertain but certainly risky in your golden years. Even though property prices are predicted to rise, the cash invested is not readily liquidable and highly dependent on our government’s policies.
As we know, the government has been implementing cooling measures to satisfy the high demand and manage the low housing supply. For instance, taxes and lowered loans were implemented recently in December to gradually regulate the property market. However if property prices continue to rise, the government may consider a harsher approach that might affect your income withdrawal.
With all these limitations, perhaps you should rethink owning a second property and ponder the other options we have suggested below.
Income Generating Assets
Surely, planting all your money in an increasingly unaffordable second property is unwise, but it is sillier to stash all your money in an asset that relies on capital appreciation during your old age. Very frankly put, there might not be enough time in your elderly years to wait for the appreciation and reap its profits.
Instead, it could be wiser for you to diversify and invest in more income generating assets such as bonds or real estate investment trusts (REITs). These investment portfolios provide more stable returns and can be easily liquidated for your rainy days.
In addition, it also saves you the heartache of selling your property in a bad market when you really need the cash. Essentially, with these income generating assets, you would not need to stress over planning the perfect exit strategy. Although you should discuss the management of your holdings with your financial advisor for a more professional opinion, this article is merely suggesting.
Right-sizing
Right-sizing (not to be confused with down-sizing) is to shift into a space that caters to your current needs better, be it a smaller home or a home with better facilities. Finding such a perfect abode can help release cash proceeds from your previous property and convert it into cash savings for retirement use.
For instance, if you find that your house has spare room(s), especially after your children moved out. Or echoing with space for just you and your spouse, perhaps it is time to consider a smaller house.
Typically, HDB flats tend to embody more “elderly-friendly” amenities, with ramps and railings installed mandatorily at every corner, not just in your home but also around the neighbourhood. To further entice seniors into right-sizing, there are also many governmental schemes (with their own terms and conditions) to assist seniors in financing their right home.
As it goes, there are many considerations in planning for your right home beside the size.
Is your home near medical facilities? Do you have to walk up many flights of stairs to reach your doorstep? How many lease years do you have left? These overlooked questions should be asked and answered before settling, as moving again during your later years will definitely be a hassle.
Closing Thoughts
With the current trajectory of the real estate market, perhaps a second property venture may not be financially wise, but remember, there are other options available. From looking at other forms of property investments to reconsidering your current home, this article has suggested some ways to prepare for your retirement besides the usual “buy low, sell high” strategy. If you are conflicted about your retirement choices, feel free to contact our experts here, they will be happy to guide you through your housing options.
