Why do investors purchase real estate for investment at such abysmal yields?
That's a terrific question. I have some ideas, and most of them assume rationality (broadly defined):
1. Because they themselves plan to live in the home, and so the property is not purely or even mainly for investment. Or, relatedly, they want a place where their kids or grandkids will likely live, so they reserve that particular nearby location. It's similar to the reason some people buy fine art, and even loan it out to museums (if it's museum worthy). Mostly, they love the painting or sculpture, and when there's an opportunity, they want it in their lives. It's beautiful, and they enjoy it -- its proximity gives them pleasure. If the art happens to appreciate a bit, that's just a bonus. There's absolutely nothing wrong with buying something you enjoy and enjoying it, that gives you pleasure, as long as you don't hurt anybody else and can afford it.
2. Because they saw their parents and/or grandparents get rich that way (as Singapore transformed from a developing to developed economy, a one-time historic event), and many really did get rich that way. So they simply do what their parents and grandparents did, hoping for similar capital appreciation.
And that's not irrational, at least not in that way. Studying hard, going to a good (or great) university, brushing your teeth at least twice a day.... There are many lessons our parents and grandparents teach us that are terrific lessons. And some lessons that aren't so terrific. As an easy example, don't smoke even if your mother does/did.
3. In the case of HDB units, because the government still offers heavy subsidies. Those subsidies help make the financial case still work after a careful analysis.
4. Because, to a degree, they are diversifying their investment portfolios. I don't think anybody is arguing for
zero real estate exposure. I certainly believe in at least reasonable portfolio diversification as a core element of prudent investment strategy. But this reason doesn't seem to apply very often in Singapore. I haven't encountered too many Singaporean investors sitting at 0% real estate exposure contemplating whether to raise that exposure to 8% for diversification reasons.
5. Because they don't think there are better savings and investment alternatives. And you know what? The other available choices weren't so great a generation ago in Singapore. (A unit trust with a 5% sales fee and 3% annual management fee? Yes, that was/is terrible.) Although that certainly doesn't seem to make
rational sense nowadays when government bond yields (!) rival real estate yields, and that's if you value your personal time at zero.
6. Related to #5, because the elusive dream itself, and working toward that dream, is fun.
Acting like a real estate tycoon gives pleasure, and that pleasure has value. So even if the financial yield is low, playing the game is fun. Casino gambling is like that for many people -- it's fun! -- albeit with negative average yields. So if you can do something you love, even if it doesn't actually compensate well, you might do it. It's also the same reason some people enter the priesthood or monastery -- there are some parallels.