Almost everyone I knew prefer to invest in properties than stocks, at least during recent years of housing boom. It is the holy grail of personal investment or call it the Singaporean Dream – a clamoured goal to signify that ‘you have arrived’. I have a few hypotheses about this preference and I will discuss in this article.
Properties are perceived to have better returns than Stocks
The Singapore Success Story has cast a societal perception that properties are the best investment to have. This perception was built upon the numerous stories about Singaporeans making multi-million dollars from properties. Contrarily, stories about stock markets are mostly awful and full of misfortunes. For example, more people remembered stocks dropped 50% in 2008 financial crisis but few remembered Singapore Property prices crashed as much as 40% in 1997. Hence, to Singaporeans, owning multiple properties is the pinnacle of wealth attainment.
SGX released an article on 25 Nov 13, comparing the performance between the Singapore Property Market and Straits Times Index (STI). And I quote,
“20 year return reveals housing prices averaged a 3.95% annualised return, while the STI on price alone generated an 3.45% annualised return. With dividends however, the STI returns averaged a 6.91% total return over the 20 year period.”
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It is a little unfair to bring in the dividends to the picture. Firstly, a property investor collects rent from properties and this is the equivalent of dividends to stocks.
Secondly, you can leverage many times with a mortgage loan. You cannot do that with stocks. No banks or financing companies will give you the same leverage for stocks. Hence, the annual return for properties will be higher than 3.95% after we factored this leverage.
Thirdly, the property market is making historical highs while the stock market is halfway between the 2008 peak and 2009 low. Hence, it is logical for property returns to be slightly higher than stocks returns. If we take another period of assessment, the reverse could happen.
Perception is reality in this case – property poses slightly higher return than stocks. However, it is important to note that perception is more important than reality. Believing that properties have better returns comforts and calms the property investors. If my belief system tells me I already had the best investment, I won’t think of selling it and I won’t panic even when prices fall. Hence, the perception helps me be a better property investor.
Opaque Property Value
Although I have no data to show, you would intuitively agree with me that investors hold on to investment properties longer than they hold on to stocks.
Stock prices are changing every micro-second during trading hours and such price actions trigger numerous emotional effects in investors. Panic in the stock market cascades to the masses in quick time which leads to more selling. This encourages investors to forgo their ‘long-term’ investments very quickly.
Unlike stocks, property prices are reported quarterly. In fact, two identical units in the same block can cost differently. There are many other factors like conditions of the flat that will contribute to the price. Hence, an investor needs to pay for valuation to know the price of the specific property and he would not do it until he wants to sell the property. Without frequent price updates, there are little emotional triggers to affect the investor. He can focus on other things in life and not worry about his property investment as long as he can keep up with mortgage payments.
Efficiency and transparency of prices have been touted as advantageous characteristics of the stock market. But most investors do not seem to be able to handle the speed and response of stock prices in order to be profitable in the long run.
To me, the returns from properties and stocks are similar. Depending on the period of assessment, you may get one higher than the other. The deciding factor between the two lies in leverage. Nevertheless, I have explained why most investors are better off with properties than stocks. The process is less emotional for a property investor and it can mean a lot of difference financially.