Young & Invested: Should you invest in shares or save for a house deposit? (revisited)
Navigating the trade-off in light of the Home Guarantee Scheme expansion.
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 38
For decades, Aussies have been sold the dream of property.
“You need to get on the ladder as soon as you can!” – your uncle (probably) at a family BBQ.
Whilst well intentioned, doing so has been easier said than done. But things don’t often remain stagnant in the investing world. Markets move, policies shift, and personal circumstances evolve.
I previously wrote on the idea of investing in shares vs saving for a house deposit. Since then, there has been a significant policy shift in the expansion of the Home Guarantee Scheme (HGS), making it a lot easier for young people to enter the market. It has changed the game for many, so in light of this, I decided it was worthwhile re-visiting the discussion.
If you don’t laugh, you’ll cry.
Same question, different rules
For the last few years, younger people have been faced with a dilemma: invest in financial markets or save for a house deposit.
Of course, the obvious answer is that saving and investing aren’t mutually exclusive activities. But the presence of this dilemma reflects the broader tensions within the economy and housing market.
Given the share market isn’t an appropriate place to park the funds you’re saving towards a house deposit in the short-term, people have largely been driven to choose between the two.
The housing crisis hasn’t emerged overnight. Prices skyrocketed, fuelled by mass migration, chronic undersupply of new stock and numerous other factors. When you combine this with stagnant wage growth, affordability has reached a crisis level.
This has created an environment in which saving 20% alongside stamp duty, legal fees and other upfront costs is incredibly difficult. Consequently, younger generations that have been left despondent about their prospects are turning to other avenues such as the share market to build wealth.
In my earlier article I expressed that the share market appeared like a better proposition, due to its relative accessibility and the opportunity cost of leaving your funds in a savings account to accumulate a deposit for 5 – 10 years. Of course, the argument is incredibly nuanced. It’s difficult to disregard the financial, emotional and social benefits to owning a home in a country with few rental protections.
Much like the share market, property prices have continued to climb despite ongoing concerns about inflated valuations and affordability. For most, the dream of buying a home has remained just that. But the landscape is shifting.
Recent expansion of the Home Guarantee Scheme (HGS) now allows an uncapped number of eligible first home buyers to purchase with just 5% down, while avoiding lenders mortgage insurance (LMI).
This is more than just a policy tweak. It signals a structural shift that has redefined the entry point into property and shifted the structure of people’s financial goals. The 20% barrier to entry has dropped significantly, meaning home ownership is no longer a distant, obscure goal, rather something that has real near-term visibility.
For many, it will reshape the decision-making process behind their goals. I’ve previously shared my thoughts on the policy and it’s effect on prices, so this week I’ll be focusing on the implications for investors who once wrote off property due to being locked out.
Accelerated affordability timeline
A smaller deposit naturally accelerates entry into the market for all first home buyers who previously struggled reaching the threshold.
My previous article focused heavily on the challenge of accumulating 20%. I calculated that a couple earning median wages and living very frugally would need around six years to save $200k for a $1 million home. This timeline was broadly in line with other estimates at the time, reflecting the difficulty of home ownership.
Sources: PropTrack, ABS. Assumes households saves 20 per cent of average household income, buying a median priced home.
The picture was even more daunting for individual buyers who would find it considerably harder to save whilst managing rent and rising living costs.
To put it plainly, the math simply didn’t work. This has been evident in the rising age of first home buyers, with Westpac data revealing one in five were over 40. With 30-year loan terms, people wouldn’t own their homes outright until their 70s. It’s not hard to see how this becomes absurd.
This was one of the reasons I struggled to justify locking away extra funds in a high interest savings account for five to ten years, hoping to eventually scrape together a 20% deposit. The opportunity cost of losing potential share market gains felt too steep. But now, the expansion of the HGS compresses this timeline dramatically. In some ways it subverts a part of my initial argument.
However just because something is accessible, doesn’t mean it’s the right move. The same logic applies to the share market, just because a stock or fund appears undervalued or is well-rated, that doesn’t mean it belongs in your portfolio. Naturally, there will be long-term lifestyle and financial implications for those using the 5% deposit scheme.
Trade-offs: Shares vs property
I’m not going to derail this article into a debate about historical return rates, or which asset classes have performed better – you’ll find plenty of that online.
I find that if you torture data long enough, it’ll probably tell you exactly what you want to hear. To my knowledge, no one owns a crystal ball for future asset class returns, so let’s keep it practical.
As a young investor, assume you’ve saved $50,000 and you meet mortgage serviceability criteria. The first question you should ask isn’t 'what will give me the best return?’, rather it’s 'where does home ownership sit within my goals?'.
If you’re undecided, this article is for you. You might be newly curious because the hurdle has been dropped and a home now feels within reach. This curiosity is valid, but so is caution.
Whilst the hurdle is lower, I don’t believe the appeal of share market investing is any less, especially for those who value flexibility or liquidity. A mortgage will lock you in for decades of repayment cycles and concentration risk. On the other hand, you can’t live in the share market and there are numerous non-financial benefits to owning a home.
I think the more important question here is 'can we now do both?'. A lower deposit requirement means that young investors might retain a modest investment portfolio whilst entering the property market – a prospect previously out of reach for many.
What do the numbers look like?
The table below is a model from Cotality that aims to provide illustrative numbers behind the scheme.
Using these assumptions, let’s look at the differences between buying with 5% and 20% in Melbourne.
Source: Cotality. Author visualisation.
In this instance, purchasing a home using the 5% scheme works out better than spending additional years in the rental market to save up the full 20%. The potential $267k in rental savings outweighs the extra $149k in additional interest paid as a consequence of using a 5% deposit.
Of course, there are several assumptions baked into this analysis, like a long-run interest rate of 5.5% and projected rental costs. Notably, it also excludes the opportunity cost of building equity earlier. There’s no doubt that individuals who buy with a smaller deposit will pay extra interest over the life of a loan. It’s up to younger investors to determine whether this trade-off is justified.
However, some may currently live rent-free with family and find it more beneficial to delay their purchase and save a larger deposit to avoid the additional interest burden. Ultimately, the scheme’s value depends on individual context, lifestyle preferences and long-term financial goals.
Earlier I mentioned that I didn’t want to make this a conversation based purely on returns, and that’s because this decision isn’t just about numbers. Taking out hundreds of thousands, if not millions in debt in your youth will have a profound impact on the rest of your life.
Not all sunshine
It might seem like a no brainer to jump in with just 5%, especially when the alternative is saving for years. But that evokes the million-dollar question: why would anyone want to save 20% when the 5% option is available? There are still valid reasons.
Firstly, a smaller deposit implies taking on a significantly higher level of gearing. This leaves you with a minimal equity buffer and increased vulnerability to market shifts. If property values fall or interest rates rise, you might struggle to keep up with repayments or find yourself in negative equity (owing the lender more than what your home is worth).
More tolerable levels of gearing lower your monthly repayments and reduce the risk of mortgage stress (typically defined as over 30% of your pre-tax income) and frees up cash flow for other financial goals. Saving the 20% also means buyers are not subjected to the eligibility criteria and price caps associated with the HGS, allowing them to buy entirely on their own terms.
The important thing to note here is that even with the HGS, higher repayments and leverage risk remain a reality. It’s up to you to decide whether it is worth the trade-off.
Tempered expectations
We’ve all heard the story of a relative who bought a $50k middle-of-nowhere house in the 80s which is now worth millions.
Such stories have defined sensationalist reporting on property investing for years. Whilst many may be true, they are also the product of a unique mix of economic and demographic factors over decades. It would be irresponsible for me to suggest that young buyers now could expect the same returns trajectory.
Housing has undeniably contributed to the wealth of older generations, however it’s important to take note of whether recency bias is clouding your judgement. Just because prices have surged the last few years, doesn’t mean they’ll continue to do so. On the flip side they could perform even better. No one has the ability to foresee that right now.
Growing up in Perth, I don’t recall property investing being much of a conversation. A large reason for this was likely due to decades of flat performance. As you can see from the graph below, Perth was notably an outlier in this case, but still a good example about how your experiences can shape your perceptions, and ultimately your decisions.
Source: CoreLogic, Domain. 2024.
The expansion of the HGS also doesn’t stand in isolation. There are several supply side measures being introduced to address affordability pressures. Whilst we know supply tends to lag, it’s entirely possible we get to a point where prices cool off or even reverse. International examples such as New Zealand, where prices have fallen by over 17% from their peak offer a cautionary tale that housing markets can (and do) correct.
The risk of young investors getting swept up in FOMO is very real. Buying simply because property feels like a ‘smart’ investment that worked for previous generations isn’t a strong enough thesis to hold you steady if the market declines or your financial circumstances change.
Concluding thoughts
Conventional wisdom stipulates that the Australian housing market is generally a reliable vehicle for building wealth.
This assumption has materialised for many investors. But nothing remains stagnant nor guaranteed. Recently proposed superannuation reforms have challenged long-held expectations around our retirement system, and there’s no certainty that today’s favourable housing policies won’t be revisited tomorrow.
This is why we emphasise foregrounding every financial decision with a clear understanding of how it aligns with your personal goals. Property ownership is a long-term commitment and demands more than the nostalgia-fuelled optimism that is driving part of the market.
But I don’t wish to drown this in pessimism. Not every young Aussie is chasing crazy capital gains or trying to replicate the success stories of previous generations. Many just want a place to live that is stable, safe and won’t put them in significant financial distress. And I think they deserve a fair shot at fulfilling these basic human needs.
Even as a vocal critic of the HGS expansion, I acknowledge that it signals a (wobbly) step toward the broader goal of housing affordability.
The housing vs shares debate is vast, layered and deeply personal. I think the largest shift we’ll see is that investing or saving for a deposit might not be a binary choice anymore. Given the lower hurdle, it now appears possible to work towards both endeavours simultaneously.
