“There’s no better investment than bricks and mortar,” is a line routinely trotted out by smug property owning types. And your grandparents.
On the face of it, they may well be right. Who wouldn’t be dazzled by annual growth in the high teens or low twenties for consecutive years that we’ve seen recently; the kind of growth that can see the value of your $750,000 apartment rise to over $1m in a few short years? Property, it seems, is the only road to riches.
With these kind of success stories abound, it would be easy to get disheartened that you don’t have a toe on even the bottom rung of the property ladder. You could be forgiven for thinking that owning a pad is the only way to progress.
But that’s, perhaps, just half of the story. What if there is another way; one that enables you to enjoy the benefits of home-ownership with none of the stresses or angst? That might just be worth checking out, right?
First, we need to delve into the psyche of property ownership. For most of us, it is the most basic fast-track to wealth; accidental wealth creation, if you like. There is no skill involved and limited downside, provided you can hold down a job to make your payments. If you are buying jointly, then the risk is mitigated further still.
Plus, we all understand property prices. Buying for $500,000 and then selling for $750,000 is a great story. Even after you take away your purchase costs and your selling costs (which none of us ever mention anyway), you’ve made a tidy sum.
Even better is to own a property that has gone up in value and have no intention to sell. Because then you can tell people how well you’ve done and what you’re sitting on: mountains of cold, hard cashola.
The problem with selling is that you then have to buy somewhere else. And that place is also likely to have gone up in price by 25% which means you now have to stump up a cool $1m to take a step-up. Big headspin.
So property ownership brings with it an element of angst but it does create wealth. This is our eternal conundrum.
What we need, then, is a way of creating wealth without the angst, particularly at a time when property prices are forecast to slow down and the threat of the bubble bursting is being lorded over us by financial journalists who have columns to fill.
It’s usually cheaper to rent property than buy it; as in the monthly costs are lower.
So, assuming you’re on the property-purchasing precipice – that is to say, you have a deposit saved, you can afford the repayments, you may even have pre-approval, and yet, your spider-sense (and your pseudo-economist friends who don’t own property and are jealous that you’re about to) are telling you that the end is nigh and it’s not the right time to buy – what could you do instead to ensure you end up no worse off should you decide to pull back?
You could try this:
If your rental costs are $800 less per month than your mortgage payments are going to be, that gives you $800 per month to invest. If you’re a Gen X / Gen Y-er looking to buy a property and meet the criteria above, I’m going to venture than you can afford to top this up to at least $1,000 each month.
So that gives us $1,000 per month to auto-invest into a low-cost index fund that gives you exposure to stock-markets without the high costs associated with more traditional mutual funds.
Whilst we’re waiting for armageddon to hit or simply to pluck up the courage to take the plunge – say three years – this gives us $36,000 + returns. Returns can run into the low teens and whilst the magical effects of compounding have yet to really take hold, we’ll still be starting to see the benefits (growth).
What this disciplined approach means is that by sitting on your hands and missing out on what is forecast to be fairly minimal house-price growth over the past three years, you’ve saved up enough to cover the pesky stamp duty. And satisfied your sense of fear.
You’re probably querying the downside. Say the stock markets plummet and we do plunge into some kind of financial abyss. Your investments will be worth less than you invested, you won’t be able to afford the house at all now.
Well, yes and no.
You won’t be as liquid so you will probably need to ride it out. But bare in mind that the two or three years after the GFC have been amongst the strongest in stock-market history. So you simply bide your time and hold on.
This is especially prescient for you because if you do fit into the cautious category I’ve outlined above, I think it’s highly unlikely that you’re going to be the kind of bold soul who is ready to take the plunge and buy a property when the financial system is crashing around us. Do you? Really? [No judgment here. I’m exactly the same as you on this].
Property is like religion; completely determined by inherent beliefs than run deep inside our psyche. If, for whatever reason, you aren’t yet ready or able to take the plunge, don’t despair. There are plenty of rational, risk-balanced approaches you can take to cover your bases whilst still having fun. And getting to sleep at night.
N.B The original version of this article first appeared on The Hip Pocket last week.