Me & My Money Series (Sunday Times)

[Musicwhiz]

Hi Musicwhiz,

I dont think it is weird that out of 10 interviewees 9 will swear by real estate. I believe for most interviewees who are between 30 and 40 would have bought their first property after the 1997 AFC. Between then and now real estate prices have doubled and in some cases tripled. Given the high leverage (80%) present in this asset class it is inevitable that anyone who seems like a skilled investor by the layman definition (i.e. made a lot of money) must have made it from real estate. There simply is no other easily replicable way.

Just think if your property doubles in 10 years the CAGR of your asset is 7%. With 80% leverage that CAGR becomes 26%. Something which any investor will struggle to match.

This does not take into account property allows you to unlock your CPF OA funds which is a good 23% of gross pay (due to employer contributions).

Hi David,

Thanks for the reply and info. Haha actually I was already expecting a reply along these lines when I wrote my comments, as I was aware of the steady appreciation in real estate (especially in the last 6-7 years) since the AFC.

But I do have three points to bring up:-

1) Time Frame - It depends on your time frame of reference when you refer to CAGR. If someone had invested in property in say 1995-1996 period, and was hit by the full brunt of the crisis in 1997, then his CAGR till now may be very low (perhaps 1%-2% CAGR?) because he bought high. This also applies to equities to be fair, if you choose a period such as early 2009-present you will see an amazing return.

2) Finance Costs - We must remember that interest rates used to be very much higher in the late 90's and early 2000's. Hence, the finance costs paid could be substantial with respect to the loans taken up to finance the properties and would erode part of the computed CAGR. Though leverage magnifies the ROE on the property, we must also account for the cost of financing in the computation as we are only looking at the market price at purchase versus market price at present. This does not apply to equities unless you are on margin.

3) Replicable in Future - This was actually opmi's comment. In the 17 years since the AFC, real estate has managed a very respectable CAGR due to many reasons - foreigner influx, development of more land in remote areas for sale, overall prosperity of Singapore, GDP growth and inflation all helping to push prices up all over the island. But looking at the next 17 years (or even just 7 years for that matter), can this be replicated? Can we always assume real estate can appreciate greater than inflation?

Personally, I don't think it's a good idea to allow CPF OA to be used to purchase real estate. This has two effects - it boosts the prices of real estate as people are more willing to leverage when they use their CPF, and it also means people have less to retire on in their CPF OA as they deplete most of it on housing.

Thanks!