One of the toughest decisions facing younger Australians these days is whether to put most of their money towards a house or into ASX shares.
The obvious advice if you’re saving for a house is not to invest in shares because you could suffer from a severe market downfall right when you want to buy your house. So you end up locking away all that cash until you can buy.
The interest return on cash is very low these days. You’ll be lucky to find bank accounts from Commonwealth Bank of Australia (ASX: CBA) or Australia and New Zealand Banking Group (ASX: ANZ) offering much over 2% these days.
Pros for investing and renting over renting
Investing doesn’t require taking on a large amount of debt and it also means your living arrangements can be flexible with a renting lifestyle. There are huge moving costs when selling and buying property.
Rent certainly costs less than owning a home in the shorter-term as you usually don’t have to pay body corp fees, building insurance, repairs, council rates and so on. That spare money can be put towards investing in shares.
If shares continue to produce average returns of around 10% per annum then shares may compound faster than the house value and the mortgage interest.
After many years of investing, a portfolio could provide enough income to sustain a renting lifestyle forever, or provide the necessary income to buy a property.
Pros for buying a home over investing
Once you buy a property, the repayments are fixed (except for interest rate changes) for the rest of the loan, whereas rent will steadily grow with inflation.
Not only will owning a home mean ‘forced savings’ but your home will hopefully grow in value over time as well. With a $100,000 deposit you can benefit from the growth in wealth of a $500,000 house with a much lower interest rate compared to a dangerous margin loan.
Another reason that’s good for owning a home is that it’s yours. Households, particularly ones with kids, want stability and a connection to their local area and school.
Who knows what the returns of shares will be? But you’re making guaranteed (after-tax) returns if you pay down the loan compared to the volatile & pre-tax returns of shares.
What all of the above says to me is that there is no one correct answer. It depends on your individual circumstances and preferences. It depends on what shares do, it depends how house prices perform, it depends what happens with interest rates, it depends if you have children or not.
The best strategy could be a combination of both – investing and saving to buy a home, which is what I’m doing right now.
If you are looking to invest in shares then these top ASX investment ideas could a great place to look for good returns.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.