Millennials and anyone else trying to save for their first home these days are in for a rough trot – as anyone under 35 will tell you. Not only have house prices spent 2019 recovering from the brief dip that we have seen recently, interest rates have plunged to new record lows.
This means that in the years it takes to save up a deposit for your home, you are getting very little help from your bank's interest rates. In fact, if you take inflation into account, most savers are actually going backwards each year in real terms – talk about swimming against the tide.
Conventional financial advice will tell you that the share market is a no-go zone for anyone who is saving for a house. The time horizon commonly recommended for shares is typically 7–10 years, meaning you will likely be told you should not invest any money that you might need within this timeframe.
There is a good reason for this as many investors lose money by pulling it out of the market at inopportune moments. Whether it's out of panic at falling share prices or because they need the money for an unexpected emergency, this kind of sub-optimal investing can undermine your long-term performance.
How ASX shares might help your housing journey
I think investing in ASX shares can be very beneficial to anyone saving for a house, if it's planned correctly.
Let me explain.
The Australian share market has produced a long-term average rate of return of between 7–10% per year. That's including the boom times as well as the rough rides like the GFC back in 2008/09.
If you want proof, take the performance of a broad-based ASX index fund like SPDR S&P/ASX 200 Fund (ASX: STW). This fund has delivered a performance of 8.12% since its inception back in 2001.
If you plan on buying a house sometime in the next 10 years, it might be a good idea to at least keep some of your capital in an index fund like STW for a few of those years. That way, you are at least getting some real returns on your money while you wait.
Of course, it's possible and even likely that the share market experiences some dips, corrections or even crashes during this time. But if you are flexible, patient and keep to your original timeframe, riding out the dips could prove a winning strategy.
This is a riskier way to save for a house, so keep that in mind. But as long as you understand both the risks and rewards of the share market, this path may well be worth it.
