Buying a home has been hailed for generations as an essential part of the Australian dream. But with house prices increasing faster than earnings, getting into the property market seems more like an impossible dream for first home buyers. You may even be better off renting in the meantime before attempting to get into the property market.
Australian capital city house prices soared by almost 8 per cent in 2014(1) while wages growth fell to 2.5%(2) - a record-low.
…move into other areas
If property seems out of reach for you at the moment, consider investing in other assets instead of buying a home now or in the future - or to save a home loan deposit more quickly.
You can aim to build wealth with shares, managed funds or a fixed-term investment. And if you’re saving a deposit, some investments could give better returns than a basic savings account.
Some investment options
Consider these options and remember that all investments involve some risk.
When you buy shares - which you’d normally do through a stock broker or online stock broking service - you’re essentially buying part of a company. You can normally buy and sell shares anytime with no minimum time limit imposed on the investment term.
Building a portfolio of shares in different companies and industries can be financially rewarding. But because markets go up and down there are risks - your investment balance is likely to either increase or decrease, and so on throughout different market cycles.
Start by gaining an understanding of share market cycles and your own attitude to the risks they present.
2. Managed funds
When you invest in a managed fund, your money is pooled with other investors’ and managed by an investment manager. The manager buys and sells shares or other assets on your behalf that ideally increase in value. The fund then distributes income - often called distributions - at predetermined intervals.
Managed funds can be offered by managers specialising in a particular investment technique or industry (sector). They can provide access to assets and markets normally unavailable to individual investors. And you can often invest with a relatively small amount of money and make regular contributions to build your investment over time.
Some managed funds specify a minimum investment term, although investment returns and risk levels cannot be guaranteed.
3. Fixed-term investments
Rather than investing for an undefined period, you may want more certainty.
Fixed-term investments offer opportunities for predetermined periods at declared rates of interest so you know exactly how much you’ll end up with at the end of the term. The downside is you’ll generally earn less than you would with other types of investments and if you withdraw your money before the end of the agreed term, a penalty will apply.
Fixed-term investments can include unlisted debentures, secured or unsecured notes, bonds and term deposits. Each type will offer specific terms, conditions and investment characteristics, normally outlined in a prospectus.
4. High-risk investments
High-risk investments can be complex, even for the most experienced investor. It’s important to consider the potentially high levels of risk before investing in assets like exchange traded products, futures, options, warrants, hedge funds and others.
Some high-risk investments are offered with the potential for higher returns, which can be tempting for investors aiming to make money in a short period of time. The reality is that you can lose money very quickly.
What’s right for you?
Investing to build wealth or buy a home can be rewarding. Whatever you choose to invest be sure to seek financial advice to ensure the investments you make match your own risk tolerance.
And ask your financial adviser about borrowing to invest - while the interest on a home loan for a property you live in is not tax-deductible, borrowing to invest (gearing) in shares or managed funds can be.
1 ABC News, 2 Jan 2015, abc.net.au/news/2015-01-02/home-prices-rise-nearly-8pc-in-2014-boosted-by-strong-december/5996972
2 Business Insider Australia, businessinsider.com.au/wages-growth-in-australia-is-at-2-5-the-lowest-since-records-began-2015-2