How to save a home deposit in 5 years


Jason Prowd  |  26th April 2018  |  8 min read

Key points
  • Entering the housing market in Australia is getting tougher
  • Would-be home buyers need an effective strategy to save for a deposit
  • A managed investment portfolio may help build a deposit far quicker than bank interest

Saving for a home deposit is tough. Super tough. For Sydneysiders, it’s 8+-years-of-scrimping-and-saving-tough. And it’s getting tougher.

The cause?

Soaring home prices.

Flat wages and the ballooning cost of essential items, like energy, haven’t helped either.

Not to mention beer prices.

Stick your money in the bank and you’re ‘rewarded’ with a paltry interest rate. Right now, for example, CBA is offering an interest rate of just 2.65% per year for a five-year term deposit (up to $49,999).

Meanwhile, inflation is running at around 2% per year, eroding the value of those savings, and you still need to pay tax on your meagre interest earnings.

After years of saving, the average Aussie 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.

So, anyone looking to slap down a home deposit in the foreseeable future needs to find a more effective path to building wealth than a savings account.

Before exploring the options, let’s unpack the problem.

How long does it take to save a deposit?

Too long. ABC recently reported new data showing how long it takes to save for a home deposit (see Chart 1).

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 data was sourced from the Australian Bureau of Statistics, the Census and property monitoring firm CoreLogic, and compiled by Bankwest. 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% of their pre-tax income in a high-interest savings account.

The affordability crisis is real…

Another way to look at the issue is through the house price-to-income ratio (which is the ratio of median house prices to median household disposable income).

The ratio 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.

..and most buyers think buying a home is out of reach

In 2017, the ANU polled more than 2,500 Australians about their attitudes to housing (Attitudes to Housing Affordability: Pressures, Problems and Solutions, 2017). It makes for sobering reading. The survey found that:

  • Around 87% are either very concerned or somewhat concerned that future generations will not be able to afford to buy a house;
  • 68% of those not in the housing market are concerned they will never be able to afford a home; and
  • 77% do not expect their families to give any financial support towards buying a home.

This pessimism is supported by an economic model produced by UBS. The model shows that the best case for a typical first home buyer, on an income of $80,000 a year is 11 years of saving $8,000 a year to get a 10% deposit. That’s for a $400,000 home (in today’s prices). In Sydney, that blows out to 40 years as the average home price is $1.2m. And if you need a deposit of 20%, then the average deposit gap blows out to 24 years (in Sydney it would be around 100 years!)

I know we’re all living longer, but 100 years might be a stretch.

A savings account may not be the answer

So what can you do?

With home prices rising and interest rates stubbornly low, if you are a would-be home buyer, you probably won’t reach your goal by tucking away your hard-earned cash in a savings account. Instead, you will need to be smarter when it comes to saving for a deposit. This involves having clear goals and a sound investment strategy.

Options you could consider include curbing your impulse spending, working more, trying to get a better-paid job (or as I like to call it, the “Joe Hockey solution”), and moving to a city or region where housing is more affordable. So, to some extent, it comes down to making choices that align with your aspirations. Still, these options are not feasible for everyone.

An investment portfolio is a better strategy

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

Take a typical ‘balanced’ investment portfolio for example. You’ll get access to a diversified portfolio made up of different asset classes, such as shares and bonds, and industry sectors, such as retail or banking. A typical balanced investment portfolio will split it’s holding 50/50 with higher growth assets (such as shares) with lower growth assets like (cash and bonds). Thus, the ‘balanced’ label. Because it’s diversified, the overall risk is spread out and minimises the ups and downs of poor performance from a particular company or industry sector.

Quoting ASIC, putting $10,000 in a balanced investment portfolio is expected to grow to $13,200 after five years (before fees, taxes and other costs). This is well above the amount you would otherwise earn in a savings account. The difference between earnings in a savings account and in a balanced investment portfolio grows even more strongly over time due to the ‘magic of compounding’. (ASIC’s MoneySmart website has plenty of other useful investing resources too.)

The faster you save the quicker you can buy your ideal home.

Most investment portfolios let you start investing with a relatively small amount (such as $10,000) and allow you to add to it over time. (We find, for example, this is a popular choice for those joining Morningstar Next.)

There are many investment portfolios to choose from, so choosing the right fund can seem daunting. A good place to start is Morningstar’s fund screener tool, which you can access via a free trial to our Premium research service. Or if you’d prefer we offer three ready-made investment options, designed for a range of goals and timeframes.

[Late edition. The Australia Government is also attempting to make it easier for folks to afford a home via their First Home Super Saver Scheme, which, in effect, gives individuals a tax break via their super fund to help accelerate saving a deposit.]

Are investment portfolios risky?

Yes. 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.

Our advice

Saving for a home is tough. Don’t make it needless harder. If you want to accelerate getting to your destination a diversified investment portfolio could be a good option.

Jason Prowd leads Morningstar Next: ready-made investment portfolios. Discover more here

© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment.  Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.

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