A savings account alone is ineffective as a means of accumulating a home loan deposit, with investing an increasingly sensible solution in some of Australia's most expensive cities. There are numerous reasons for this--most notably soaring home prices, compounded by flat wages and the ballooning cost of essential items, like energy.

Low interest rates have also not helped--at least on the savings front. Right now, for example, Commonwealth Bank is offering an interest rate of just 2.65 per cent per year, for a five-year term deposit up to $49,999.

Meanwhile, annual inflation is running at around 2 per cent, eroding the value of those savings, and you still need to pay tax on your meagre interest earnings. After years of saving, the average Australian could be even further away from their goal of buying their own home due to the ever-widening gap between what they have saved and what they need.

Looking beyond savings accounts, there are several options you--or your family members--can explore to find a more effective path to building a home deposit.

number of years for an average income couple to save a house deposit housing market

Chart 1 shows that averaged across Australia’s capital cities, it now takes 4.9 years to save the 20% deposit required to buy a median-priced house and 3.6 years to buy a median-priced unit. This balloons out to 8.2 years for people wanting to buy in Sydney, making saving for a deposit almost impossible for most first home buyers without help from the ‘bank of mum and dad’ or a timely windfall.

The figures used in the study were based on ABS income data of the average combined salary for two people aged between 25-34, saving 20 per cent of their pre-tax income in a high-interest savings account.

Affordability crisis

Another way to look at the issue is through the house price-to-income ratio. This is the ratio of median house prices to median household disposable income. It shows that housing affordability in Australia has dramatically declined over the past 30 years. The ratio has surged to a record 6.5 times, up from 2.5 times in 1987. The blue line in Chart 2 tells the story.

house price to income ratio first time buyer property market

Prospective home buyers probably won’t reach their goal through a savings account alone.

Things like curbing impulse spending, working more, or seeking higher-paid--or as I like to call it, the “Joe Hockey solution”--can get you closer. As can moving to a city or region where housing is more affordable. But these options are not feasible for everyone.

Building an investment portfolio

A better way to gain potentially higher returns is to regularly contribute to an investment portfolio.

Starting with $10,000 in a balanced investment portfolio, the balance should grow to $13,200 after five years--before fees, taxes and other costs--according to calculators from the Australian Securities and Investments Commission (ASIC).

Most investment portfolios let you start investing with a relatively small amount such as $10,000, allowing you to add to it over time.

Selecting the right fund can seem daunting. A good place to start is Morningstar’s fund screener tool, which you can access via Morningstar's Premium research service. There is also a choice of three ready-made investment options, designed for a range of goals and timeframes.

Managing investment risk

Every investment has risks. A balanced investment portfolio can never be as ‘safe’ as cash in the bank. There is always a risk that a portfolio’s investments may underperform or decline in value – we’ve all heard about stock market corrections. So, the key issue is to choose your portfolio carefully and opt for one with a strong track record. You should also choose a portfolio that suits your risk tolerance and investment timeframe.

Don’t make it harder than it needs to be. If you want to get there faster, a diversified investment portfolio could be a good option.

This article originally appeared on the website and blog of Morningstar Next.


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Jason Prowd leads the Morningstar Next team in Sydney, Australia.

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