Should you buy a Property or Stocks/REITs in 2022? (as a Singapore Investor)

I received a great question from a reader recently:

Dear FH, 

I have been following your articles for some years now and would like to thank you for all the awesome content that you write.  

I am in a bit of a dilemma now with regards to what to do with a sum of money that me and my husband have saved up over the past 5 years. And wonder if you can help to shed some light on this ????

Not sure if its ok to ask you about this. But don’t really know who else to ask. If we ask a property agent, they will surely try to convince us to buy a property. And friends around us are not savvy enough to give us their opinion. 

We have been saving and investing the best that we can for the past 5 years ever since we got married. 

We have about 200k cash on hand.  

If my husb buys a new 2 bedroom condo for investment. We would have to fork out about 82k cash. The rest by cpf. We intend to sell it at the 3 year mark. Hopefully to make a profit of 100k and above in 3 years time. 

My question is whether we should dca the 82k slowly into stocks, reits, etfs in the current bear market? or should we put it into a property? 

Which may generate a better return? 

My concerns are:

1. the rising interest rate environment that we are in right now. 
2. the new launches are going at crazy prices of $2200 psf for OCR projects. I just wonder what’s our upside if we are buying in at such a high price. 
3. Should we be forking so much cash when I’m on no pay leave. 

For context, 

1. I have a resale HDB which I bought when I was single (rented out). 
2. We have about 300k in investments (stocks, reits, bonds, etfs) 
3. We have 2 young kids and elderly parents to care for. 
4. We have steady jobs but I’m currently taking no pay leave from work. 
5. We are in our early 40s.

Hopefully you can share with us your opinion? 

Note: Some details have been tweaked to preserve anonymity.

  

Should you buy a Property or Stocks/REITs in 2022? (as a Singapore Investor)

The more I thought about it, the more I found this quite a complex, nuanced issue.

The answer isn’t as straightforward as buy xx because you will make more money.

So I wanted to share my views in this article.

And hopefully it might come in helpful to others out there who are facing a similar dilemma.

Investment Returns – Which will make you more money?

Let’s start with the pure investment aspect.

The 2 options on the table are:

1. Buy a 2 bedroom property – with $82,000 cash, and the rest CPF
2. Buy $82,000 worth of Stocks/REITs

Buy a Property

It wasn’t very clear, but it seems the reader is looking to buy a new condo.

Some of the new 2 bedrooms are about 600-700 sq ft, so at $2200 psf that’s a purchase price of about $1.3 – $1.5 million.

With $82,000 cash, that means $293,000 from CPF.

Which is not unrealistic for a 42 year old who hasn’t touched his CPF-OA.

Is $100,000 profit realistic on a $1.5 million property?

A $100,000 profit on a $1.5 million property over 3 years is a 6.6% return.

This works out to a 2% return a year, give or take.

I suppose that’s not unreasonable.

Are you buying property a high?

Unfortunately – Yes I think so.

I wrote a long post for Patrons recently on the housing issue.

The long and short is that I think rentals/prices can hold up short term because the supply of housing in Singapore is still very tight.

But if you look out into the medium term, say 2 – 3 years, then the picture does look quite different.

Over a longer timeframe – More supply will start to come online.

And the rising interest rates are going to kick in.

I mean just look at the latest interest rates – 10 year SGS is at 3.05%.

If mortgage rates go anywhere near there, and stay there, I would expect demand for housing to come down significantly.

The early signs from other countries are not positive:

Is a 3 year holding period realistic for Singapore Property?

That said – a big gripe I have is that I’m not sure if the 3 year holding period is realistic.

I think we’re at a short term high now, so whether you’ll be able to flip the property for a profit in 3 years, is quite 50-50 in my view.

The longer one is able to hold the property, the higher the certainty of returns.

Otherwise, it will come down to how good you are at picking the property, and what the macro conditions / cooling measures / demand supply situation is like in 3 years. 

Which can be quite hard to predict.

I think there is a real risk if you pick poorly, and if macro conditions turn – you could be underwater on your property in 3 years.

How much can you make with $82,000 in Stocks / REITs?

Let’s not mince words.

If you want to make $100,000 on stocks/REITs, with a $82,000 initial capital.

That’s a 120% return over 3 years.

Which means you need to achieve a 35% a year return – for 3 years straight.

I mean it’s not impossible, and if you’re a great investor, with fantastic timing and nerves of steel, you might just pull it off.

But if you do – you should probably switch to fund management full time instead.

With this kind of performance, I’ll give you my own money to invest.

What if you invest more in stocks/REITs?

Let’s say you decide to all-in stocks.

You take the $82,000 cash, throw in $100,000 CPF-OA (the max you can invest assuming a $300,000 CPF-OA).

Maybe you even take a $100,000 margin loan on top of that.

That’s only $282,000, give or take.

A $100,000 return on that is a 35% return over 3 years.

About 10% a year.

Not impossible – but you probably need to take on a fair bit of risk. Which makes it very tricky with the margin loan.

What would I do?

So from a pure mathematical perspective.

If I buy a house, I just need to achieve a 2% a year return to make $100,000 over 3 years.

If I buy stocks/REITs, I need to achieve a 35% a year return (or 10% a year if I’m ultra aggressive) to make $100,000 over 3 years.

Which would I be more confident in achieving?

Probably the former.

But… I think the situation is much more nuanced than that..

Leverage is a double edged sword

If it isn’t already obvious by now – the key differentiating factor above is leverage.

Leverage allows you to juice your $82,000 cash outlay into a $1.5 million property investment.

But of course, leverage works both ways.

Just like how it can juice your returns.

It also means that if you buy the wrong property, or if the property market turns against you, you can lose far more than your initial $82,000 cash outlay.

Differentiating between the short term, and the medium term

The other point I wanted to add though, is that the timeframe is key.

If you’re investing for 1 year, 3 years, or 5 years – your considerations are very different for each.

My simple view is that I think the short term (6 – 12 months) will be bad for financial assets.

Tightening monetary conditions and rapidly rising interest rates are going to crush financial assets, which is a point I’ve been going on and on about since Jan 2022.

But if you look past the next 12 months.

If you look into second half of 2023, or 2024 and beyond.

What does that look like?

I don’t know about you, but it looks very inflationary to me.

Why I think this decade will be inflationary

I just see a confluence of factors coming together to create supply chain disruptions that persist into the middle of the decade.

Underinvestment into commodities. Russian oil getting shut off due to sanctions. Transition to net zero. Deglobalisation.

I see many supply chain disruptions, but very little realistic solutions.

The solution from the Feds is to raise interest rates.

And sure – higher interest rates will crush demand. Demand comes down, and inflation goes away.

But at some point, the pain will be too much to bear.

At some point – whether the S&P500 is down 30%, 40% or 50%, the Feds will relent.

This isn’t China, the Americans and the Europeans don’t have the stomach to do what it takes to truly crush inflation.

When the pain gets too much, they will roll over.

So some time in 2022/2023 when financial assets are crushed, and after the mid term elections, the Feds are going to start easing interest rates, and printing money again.

But the supply situation hasn’t been solved right?

So when demand recovers – prices start going up again, and inflation comes back.

What do the Feds do?

Reducing Inflation Will Come at a Great Cost: Stagflation

Ray Dalio wrote a great piece this week on inflation.

It’s well worth the read, but to sum up:

In summary my main points are that 1) there isn’t anything that the Fed can do to fight inflation without creating economic weakness, 2) with debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy, and 3) over the long run the Fed will most likely chart a middle course that will take the form of stagflation.

Ray Dalio probably puts it more eloquently than me – but the gist is the same.

The Feds will try to fight inflation, which will cause a financial asset sell-off (and possible recession) in the short term.

But mid – longer term, they don’t have the stomach to do what it takes to crush inflation.

And they will return to money printing, which will result in an inflationary decade.

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Gun to my head – Which do I pick?

Okay gun to my head – do I buy a $1.5 million property this year, or $82,000 in stocks/REITs?

I’m probably buying the property.

But – and massive caveat here, I just think I’m buying into a short term high in the property market. With rising interest rates.

So I’m going to do a ton of due diligence, and make sure I’m picking the right property. 

This isn’t a bull market where a rising tide lifts all boats, and you can get sloppy with your selection. In a weakening market, only the strong properties perform well.

The reason why I picked this way – is really because of the leverage.

In an inflationary decade, you want to take on as much debt as you can, and use it to buy real assets.

The value of your real assets goes up, while the value of your mortgage gets eroded away.

How to finance the loan?

That being said – there’s no doubt that interest rates are going to go up short term.

Do you go with fixed or floating?

I know a lot of you have been writing in for my views on this, and I plan to write a full article for this. But in this market – I think you’re pretty much forced into taking floating rates. The banks themselves know interest rates are going up quick, so the fixed rate loans are priced in such a way that they aren’t sufficiently attractive (in my view).

In any case – I came across a fantastic tool by Property Guru.

Do give it a try if you’re close to refinancing. It’s completely free – you just input your mortgage details, and the tool lets you know whether you’ll save money by refinancing.

If the answer is yes, they’ll give you recommendations on what loan to take.

If the answer is no, you can set up a reminder for the tool to remind you when its time to refinance.

I set up the reminders for my own properties just this week and it’s pretty neat.

Do give it a try here.

How to service the mortgage? Should you be forking out this much cash?

The reader has $200,000.

After $82,000 spent on the house, that’s $120,000 left in cash.

But this is a new property, so you can’t rent it out.

While mortgage payments will be going up due to rising interest rates.

Should she be forking out this much cash?

That’s ultimately a question only the reader can answer.

Everyone’s risk appetite is different, and I don’t know the income situation of the family.

But the way I see it, $120,000 cash, CPF-OA fully depleted to pay off the house, 1 income in the family, 2 young kids and elderly parents to care for.

I think that might be a little too tight for my liking, from a cash flow perspective.

Sure there is $300,000 in stocks/REITs, but if the market declines further this year, most of that cash cannot be accessed without selling at a big loss.

Caught between a rock and a hard place

But I mean I completely get the dilemma here.

Play it safe and chuck the cash in a bank, and watch it get eroded by inflation.

Take some risk for the chance to make more, but risk losing your hard earned cash.

It sucks that we are in this situation, but a decade of poor central bank policies has us here. And it is the ordinary people who have to pay the price.

It breaks my heart.

Third Options – Hold cash

There is of course a third option here – which is to just do nothing, and hold cash.

The upside, is that if the rising interest rates cause a property market crash, or stock market crash, then at least you escape the losses.

And you can buy into a low.

The downside of course, is that if the property market doesn’t crash – perhaps because supply is tight, or government intervenes, then you’re out of luck.

The other problem with this kind of thinking, is that I know of many investors who patiently build up a warchest to “Buy the Crash”.

Then when the collapse comes, and the Feds pivot, they are too afraid to buy because REITs are down 40% – and they think it can go down another 20%.

So I think you want to think a bit about the kind of investor you are.

If you have nerves of steel, are a seasoned investor – with no problems deploying serious amounts of money into a 2008-style event, I think this third option can be considered.

If you’re prone to panic selling, then maybe you want to think twice.

What would I do if I had no constraints?

Let’s say I didn’t have any of these constraints.

What would I do, if I were in the same situation?

I might actually use the money to buy a resale condo, and rent it out for yield.

But I won’t be in any rush to buy.

If I see a great property at a decent price, Ok I go for it.

If I dont see anything I like, I could just sit on my hands for the next 6 – 12 months, while I watch the global macro play out. And I can then decide whether to buy a property or stocks/REITs, depending on how prices move over the next 12 months. 

I went with this approach because I still think the leverage is the key.

The leverage allows you to multiply a $82,000 cash outlay into a $1.5 million investment. Which I think could be very helpful during this decade, which I still think will be an inflationary one.

The same with stocks, only takes you up to $300,000, and with significant risk.

But with this approach – the price, and the property are absolutely key. As is cash flow management in the short term, as interest rates go up.

Pick wrongly and you can lose big money. Which is why I would not be in any rush to buy.

Bide your time, and if no fat pitches come along – you can always change your mind and buy REITs if they drop in price significantly.

With a resale property, valuations also haven’t gone up as much as the new launches. And you *should* still be able to rent out the property, to cover some of your monthly mortgage payments.

But frankly – there is no free lunch in this world. If you want to generate returns, you do need to take on a certain level of risk.

The question to ask yourself is whether this is a risk you are comfortable with, if things head south.

Update: Be realistic about the return?

I had a couple of great discussions with readers on this.

And it got me thinking – Maybe the real answer here is to be more realistic about the returns.

With property markets at a high, a collapsing stock market, and the most aggressive Feds in 25 years – frankly this is not the kind of macro climate you want to be loading up on risk.

This is the kind of market where as long as you get through the next 12 – 18 months without a significant loss of capital, you’re already happy.

And I can get on board with this.

So maybe the answer here is to just hold cash, and bide your time – and wait for the Feds to pivot before deploying serious cash.

Closing Thoughts: Be realistic with your level of knowledge

The final point I wanted to make – is to be realistic with your level of knowledge.

Picking the right property is absolutely key here. You must realise you’re buying into a property market at a high, with rising interest rates. 

And whether the rental market will hold up going forward, nobody really knows.

I have a simple guide on the points to look out for when evaluating property, but you must understand that for every property transaction, there is a seller on the other side.

There is a guy out there, who thinks that he is getting a fantastic deal selling his property to you.

Do you think you are smarter than him?

Because that’s what it’s going to come down to.

Refinancing Tool – Will you save money by refinancing your mortgage?

I know a lot of you have been writing in for my views on fixed vs floating loan mortgages, and I plan to write a full article for this.

But in this market – I think you’re pretty much forced into taking floating rates. The banks themselves know interest rates are going up quick, so the fixed rate loans are priced in such a way that they aren’t sufficiently attractive (in my view).

Whatever the case, mortgage rates are going to move a lot in the coming months, and if you’re out of your lock in period, it’s probably a good time to refinance.

If so – there’s a fantastic tool by Property Guru.

Do give it a try if you’re close to refinancing. It’s completely free – you just input your mortgage details, and the tool lets you know whether you’ll save money by refinancing.

If the answer is yes, they’ll give you recommendations on what loan to take.

If the answer is no, you can set up a reminder for the tool to remind you when its time to refinance.

I set up the reminders for my own properties just this week and it’s pretty neat.

Do give it a try here.

As always, this article is written on 24 June 2022 and will not be updated going forward.

If you are keen, my full REIT and stock watchlist (with price targets) is available on Patreon. You can access my full personal portfolio to check out how I am positioned for the coming downturn too.

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