Building wealth beyond home ownership

I admit to being a big fan of home ownership, but today’s first home buyers can face an uphill battle. On one hand property prices are falling. But interest rates are rising, and this can have serious repercussions for first home buyers that go beyond higher loan repayments: Higher rates can also impact the size of the loan you can borrow.

Back in September, the Reserve Bank calculated that the 2.25% increase in interest rates since May 2022 “will have reduced borrowers' maximum loan size by around 20 per cent”. So, a first home buyer who may have earned sufficient income to take out a home loan for, say, $600,000 at the start of the year, may now have their borrowing power cut back to $480,000.

Property values certainly haven’t fallen by that much. So the only solution for a first home buyer can be to keep slogging away at growing savings for a deposit. The silver lining to the cloud of higher home loan rates is that returns on deposits have increased also.

More broadly though, high property prices mean fewer Australians are buying a home of their own.  Over the past two decades, the percentage of Australian households that own their home has dropped from 71% to 66%.

This is a genuine concern because while renting has its benefits, paying off a mortgage is like a form of forced saving. Yes, you pay interest, but by the time you’ve paid off the loan your property is likely to have grown in value – potentially many times over.

However, building long term wealth and financial security doesn’t have to hinge on home ownership. Other ‘growth’ investments including shares and exchange traded funds have the potential to deliver strong long term returns – and with considerably less capital outlay and ongoing costs than property.

Happily, it seems more Australians are taking an interest in investing. Money watchdog ASIC reports that over the last year, traffic to the ‘Investing’ page on the Moneysmart website has jumped by 7%, to be viewed over 2.5 million times.

The catch is that it pays to be disciplined about putting aside and investing on a regular basis. Fortunately, this sort of forced saving doesn’t have to demand any effort on an investor’s behalf. Plenty of online broking and investing platforms let you set up recurring trades so that you automatically invest a set amount each week, month or quarter.

Let me stress, home ownership matters. But if you feel it’s beyond your immediate reach, it’s worth steadily building a portfolio of other investments to achieve long term financial independence. That portfolio could even form the basis of a future home-buying deposit.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.