Saving Now Will Save Your Bacon Later

Sydney Morning Herald

Saturday September 22, 2007

Alex Tibbitts

First-home buyers would be unwise to dive into the market now and should wait for things to cool down. Alex Tibbitts reports.

KEVIN BAILEY, the executive chairman of financial planners The Money Managers, thinks it is a bad time to enter the housing market.

"The time to buy is during a recession," Bailey says. "We're in the middle of an economic growth spurt. Don't believe the sales hype that property always goes up and that they'll miss out getting into the market.

"In every country in the world, and in every decade, there's evidence that property prices can and do fall. There is every possibility that property prices could fall by 10 or 20 per cent, orgo sideways.

"[First-home buyers] are best off saving like there's no tomorrow to build a deposit of 10 or 20 per cent and buy during the next recession, whenever that will be.

"Just rent the smallest apartment, the dingiest house they can possibly put up with and save like crazy and build a real nest egg."

Where there are two people, they should aim to save the total income of one.

"If they can save $20,000 a year and live off one income and live a frugal lifestyle for five years, then they could end up with more than $100,000 deposit," he says.

"If they get $100,000 deposit, they'll never be in the situation [of those] people who have borrowed 98 per cent of the value of a property and overpaid for the property that they're in today."

Bailey says banks are fine for deposit savings up to $10,000 but then you should see a financial planner for investment advice.

"If you're looking to do something in the next two to three years, nice safe bank deposits, which don't give you much interest, could be the way to go." If you have five years, he says, you should look to the markets.

"Over any five-year period the chances of having negative return are very low. Invest in a spread of assets: in shares in Australia and overseas; invest in listed property; government bonds; bank deposits. 'Diversify or die.' Invest in a way that gives you no massive exposure to one sector."

Bailey is not a big fan of managed funds. "Managed funds do a lousy job. Using an index , which you can buy really cheaply for a fraction of the price of a managed fund, can give you the broadest diversification in the market - all the shares in the market. You can't get more diversified than that."

Trying to accelerate investment gains by taking out a margin loan to borrowfor shares has become less popular since the sharemarket started nosediving recently, he says.

"If the market goes back 8 per cent, you're not only losing your money but you're losing the money of the banks, which you have to pay back."

He would recommend a margin loan only if you have a good income and cash flow and at least seven years to ride out short-term fluctuations.

Noel Whittaker, director of financial planners Whittaker Macnaught, doesn't share Bailey's caution about entering the property market at the moment, or the need for a hefty deposit.

"You'd certainly be wanting 5 per cent deposit, though. Renting and saving is fine as long as you save the difference. Have it taken out of your bank account [and into a designated saving account]."

Whittaker says there is no need to invest your deposit savings in stocks and bonds when "Bank West is offering 7 per cent".

He also suggests buying an investment property as an alternative to buyinga home.

"Look at an investment property where you get all the tax breaks. You don't get the first-home buyers grant [$7000], which is fairly small in the scheme of things," he says.

"The higher income the better because that's the amount you'll get back because of negative gearing."

© 2007 Sydney Morning Herald

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