To buy or not to buy? Home versus shares

Melissa Jenkins
(Australian Associated Press)

 

It’s you, maybe you and your significant other, versus the soaring cost of an average Aussie home.

You’re not after anything flash, just somewhere nice, comfortable, and close to schools and public transport. It might even have a modest backyard where you can have summer barbecues with your mates and play cricket with your future kids.

If you want to live in Sydney you better be saving on fast-forward.

The median cost of a home there was $928,000 in mid-March, 18.5 per cent more than it was at the same time last year, according to analytics firm CoreLogic.

If you want to avoid forking out thousands for Lenders’ Mortgage Insurance, you’ll need a 20 per cent deposit.

So if you’re buying a Sydney home in March 2017 without insurance, be prepared to cough up an average minimum deposit of $185,600.

Melburnians have it easier but are still faced with an average house price of $692,000, 14.2 per cent higher than back in mid-March 2016.

Some would-be first home buyers are surely wondering if it’s really worth it?

Should they ditch their dream of owning their own home and invest in shares instead?

Unfortunately there is no easy answer and It depends on how much risk you can stomach.

Historically, property and shares offer roughly equal returns.

The May 2016 ASX Russell Investments Long-term Investing Report found of all the different asset classes, residential property yielded the highest gross annual return – 10.5 per cent – over the 20 years to the end of 2015.

Australian shares were the next best performing asset class, at 8.7 per cent annual gross return.

If you’re savings are on track and you want to buy your first home, it might pay to pause to see whether current sky high prices start to sink back to earth.

The central bank hasn’t raised rates since November 2010, with the official cash rate sitting at 1.5 per cent.

Most economists expect rates to remain unchanged for the rest of the year but we could be in store for a rate rise next year.

AMP Capital chief economist Shane Oliver predicts the property market should start to soften some time in the next year to 18 months.

“At some point, probably in the second half of next year, interest rates will start to rise and that will start to act as a break on property prices,” he told AAP.

A lot of people feel more comfortable owning a tangible investment like a home rather than investing in shares.

Financial planner Tony Gilham said given hefty stamp duty, legal and real estate agent fees, it is often better for would-be first home buyers to hold-off until they are ready to purchase the home they want to live in for the long-term rather than turn it over in five years.

“It’s quite feasible for somebody now to have a decent saving commitment over the next three to five years in expectation that the property they want won’t be a lot more expensive if not at all more expensive,” he said.

If you decide to wait to buy property you could park your money in a high interest savings account and earn around 2.5 to three per cent interest per year.

A higher risk option with a potentially higher return would be to invest your cash in shares, though you run the risk of ending up with less money than you started with.

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