Home ownership is a dream slipping away for many Australians
The evidence is finally in and the old dream of owning a home in a place you want to live in has disappeared or will be significantly delayed for many people in younger generations.
The costs of buying even a modest place to live has at the very least moved into a “later in life” alternative or in some cases is completely out of the question.
In very simple terms, house prices have been increasing at double the rate of average incomes since the year 2000 and that has had the effect of reducing the ability of huge swathes of the population to afford to buy housing and pay it off over time.
CoreLogic figures for Sydney show exactly why, and this trend has been basically repeated around the country.
For a couple working full-time and earning the median income the percentage of suburbs they could afford to buy without spending more than 30% of their salary on repayments has fallen from 67% in 1994 to just 19.2% now.
Within ten kilometres of the CBD, the same percentage has fallen from 31.7% to just 3.8%.
Time to look for alternative dreams
So, what are the alternative dreams that can be “sold” to younger generations and how can they be realised, given that some fairly tough and expensive decisions await those who enter retirement without a paid off roof over their head?
Well, the first alternative I would suggest is to postpone the original dream rather than scrap it entirely – perhaps through rent-vesting or by delaying the purchase and perhaps size of a first home by a decade or more to make it more affordable.
However, there are also some other alternative dreams to pursue that provide similar financial chances of living a successful life and reaching a successful retirement without too many money worries.
Leverage is property’s secret sauce
One of the first things to remember is that one of the key reasons why property has been such a great investment is not so much the actual return but the effect of leverage over that return.
If you borrow 80% of a property that rises in price, it is that leverage that really magnifies the return, not the actual return itself.
In fact, the share market has produced slightly superior returns, with the ASX 200 Total Return Index producing a compound 8.06% (including reinvested dividends) over the decade to June while Sydney’s average house price grew by 7.1% compounded over the same period, with the return on units lower still.
It is a similar story for the other major capitals, so the key is not so much the return but the effect of leverage.
Other benefits of ditching the property dream
There are other benefits of the share market versus property example, with the main ones being that shares can be bought gradually over time using dollar cost averaging and there is no large stamp duty, interest or transaction costs to pay.
Counteracting that is the fact that owning your own property to live in is capital gains tax free, which is a terrific feature.
One way of adding leverage to share market investments is to use geared exchange traded funds or a margin loan, strategies that I covered in more detail here.
There is another product which aims to make share market investment much more like buying a house, complete with a loan that must be paid off over time.
Known as FundLater, the idea is that investors put in $4000 of their own money and borrow $6000 to spend a total of $10,000 on a portfolio of exchange Traded Funds or ETFs, paying off the $6000 over 20 monthly instalments of $325.
That means they pay a total of $500 in fees.
Ways to include forced savings
The idea is that borrowers immediately receive magnified exposure to the market, and gradually pay off what they owe.
Obviously, the product can be scaled up or down but the basic idea is that it functions just like a forced savings product like a home loan and will be a familiar concept to many.
Paying down a debt is often easier than having the discipline of saving.
Like all leveraged products, if the share market falls during the loan term, the final amount invested can be lower than what you have contributed because debt magnifies both losses and gains.
One of the big advantages is that you know how much the repayments are up front so repayment is more straightforward and less of a high wire act than the world of margin loans and their attendant risk of margin calls.
It pays to be cautious with borrowings
Some financial planners are understandably wary of adding leverage to share market investments but are more comfortable for clients that have had a long history of negotiating the pitfalls and cycles of the share market.
Each method – margin loan, structured loan or geared ETF – has their own advantages and disadvantages so it is up to investors to choose the method that suits them best.
When choosing geared ETF’s, however, it is important to avoid the very highly geared ones that are designed for trading and instead used those with gearing closer to 30 or 40%.
Even then, it is worth remembering that your minimum investment period to achieve good returns may be a little longer than for using an ungeared product, given the extra volatility that debt adds to the already volatile share market.