Banking: Effie Zahos

First-time buyers will struggle to build a deposit if they leave their savings in cash

Even if house prices in Sydney fell by 50%, first-home buyers would still need $100,000 for a 20% deposit. While this column won’t solve the affordability crisis – I’ll leave this to the government – it will get you thinking about whether you’ve been saving money the wrong way.

Let’s say you can save $100 a week. Put it under the mattress and it will take you 39 years to accumulate $200,000. Of course, nobody in their right mind would use a mattress for their savings but most budding home buyers do use online savers and right now they’re only slightly better than money under the bed.

Figures from the Reserve Bank show that the average interest rate paid by bank online savings accounts (excluding bonus interest) is 1.25%, which means in real terms you’re going backwards with inflation at 1.30%.

Ideally you want to be able to save in line with the asset you want to buy, in this case property. And never have there been so many options for first-home buyers to do just that. According to Anthony Millet, the CEO of BrickX, an online platform where savers can invest in property with just $100, the difference between investing in, say, cash versus property could have been as much as 114%, but more on this later.

Steve Mickenbecker, Canstar’s head of research, product and strategy, says cash still has its place but with more than 30 institutions having cut rates on savings accounts since November last year the onus is on consumers to find a decent return.

“You can’t just set and forget – you’ve got to manage cash accounts,” he says. “With online savers you need to be making regular deposits or link your accounts if you want the bonus rates. With term deposits you need to manage the maturity. Don’t just let the bank roll your term over again.”

Of the savings accounts on Canstar’s database, the maximum total rate (base plus promotional) is 3.05% from ME Bank. ING Direct and RAMS offer 3%. If you’re happy to lock away your savings in a term deposit, Canstar’s six-month top rate is 2.8% from Teachers Mutual Bank and UniBank. The top 12-month rate is 2.85% from Firstmac.

With rates expected to increase over the next 12 to 18 months, Mickenbecker warns savers not to lock in for long terms but rather spread their investments over several terms to catch any upswings.

While your money is certainly safe in cash accounts, you certainly won’t reach your 20% deposit anytime soon. And the biggest problem, of course, is ensuring your deposit keeps up with property price growth. “The ability to save in line with the market over the last 15 years would have yielded significantly higher returns and also would have given those saving enough funds to get into the housing market,” says Millet.

Using historical returns across different asset classes, he calculates that Melbourne housing saw a 173% return including rental income (see table). For other ways to build a deposit in property see page 65.

While there is merit in investing in the asset class you want to buy, Mickenbecker points out there are risks. “If there is a hiccup in that market you want to buy in and you’re invested in either a fractional fund or managed fund that invests in the same asset class, you want to know how liquid this fund would be. If, say, Sydney property comes off and there’s a rush for door, how will that investment fare? It’s for these reasons that traditional investments like cash need to remain in your portfolios.”