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How Many Properties Must You Own to Retire in Peace?

People are desperately snatching up houses in China, and it’s not mainly because they need more room to house their kids.

It is disturbing to see so many people fight tooth and nail to acquire an extra house, and some even go to the extent of going through a fake divorce to take advantage of loopholes in the housing policy.

The reason they do so is most likely not due to immediate needs, but because they see extra houses as nest eggs for retirement. Instead of relying on pension, many feel that they can get a better source of income through renting out properties.

How many houses do we need in order to retire comfortably then?

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When the above question has been asked in the online forum bbs.tianya.cn, many respondents expressed that one should have “at least two houses”.

Rationale behind the Housing Craze

First and foremost, we must know that China’s property market is soaring to new highs, and housing prices keep growing especially in high-profile cities like Shenzhen, Guangzhou and Shanghai.

Let’s look at Shanghai and Shenzhen for example, where housing prices (including resale) are still on the rise.

hsbc-shenzhen-and-shanghai-house-prices
hsbc-shenzhen-and-shanghai-house-prices
Second-hand House Price Index, Shanghai. Source: http://www.globalpropertyguide.com/
Second-hand House Price Index, Shanghai. Source: http://www.globalpropertyguide.com/

Second-hand House Price Index (Shanghai). Source: www.globalpropertyguide.com

Given this backdrop, owning properties seem like a smart choice indeed. The common understanding or assumption is that those who rent will end up poorer than those who buy. Similarly, people also think that buying earlier is always better than buying later, and buying more is always better than buying less.

Here’s a comment by a netizen, which I think captures this mentality pretty well:

“We are talking about how many properties we should own, and not how much money we should have for retirement, because we are taking account of inflation. Inflation is unavoidable yet unpredictable, so no matter how much money we save, it does not guarantee us a quality life after retiring. But houses are different. In the case of inflation, won’t rentals rise alongside other commodities as well?”

But another netizen raised a contrary view:

“We are very invested in properties now because currently, properties have strong growth and give high returns. But the situation might not be the same after twenty to thirty years, when we have actually hit our retirement age. Keep in mind that houses were not the most valuable assets thirty years ago, so who knows about how things will be like in twenty, thirty or even forty years’ time?”

Beware of the Housing Bubble

While our “kiasu” mindset urges us to join in the “house-snatching” craze when everyone else is doing it, we need to ask ourselves: Is there any commodity that will only keep rising and will never fall in value?

Also note that the asset price bubble had burst in Japan in 1991, and till now prices have yet to recover.

Image Source: http://www.doctorhousingbubble.com/
Image Source: http://www.doctorhousingbubble.com/

Image Source: www.doctorhousingbubble.com

What happens when the housing bubble bursts?

Theoretically, here’s a chain of events that is likely to take place: Housing bubble burst–>economic downturn–>rising unemployment–>property owners/buyers lose their jobs, making them unable to service their mortgage loans–>housing prices continue to fall–>property owners resort to panic selling but the money is not enough to pay back their debts–>they end up houseless and broke.

Fortunately, we don’t see such frenzied house-buying in Singapore, partly because housing prices are now falling, and thus people probably don’t see it as a good investment.

House price % change over a year earlier (Singapore) , source: http://www.globalpropertyguide.com/
House price % change over a year earlier (Singapore) , source: http://www.globalpropertyguide.com/

House price % change over a year earlier (Singapore) , source: www.globalpropertyguide.com

According to the HSBC Future of Retirement survey, Singaporeans are still predominantly using cash savings, supplemented by day-to-day salary and a property downsize to fund their retirement.

However, will that still be the case when property prices begin to rise again? According to industry experts of the Real Estate Developers’ Association, residential property prices could begin bottoming out over the next few quarters and should recover moderately from 2018.

For those who wish to purchase properties when the property market is at its bottom, here’s your chance. But we cannot assume that it is a good retirement plan, or a good long-term investment that will certainly pay off.