“Shares or property” is the $64,000 question. Although perhaps we should call it the $640,000 question given how much a COVID economy has upped the economic ante.
Both should be thought of as longer term investments. Property, very long term.
Both have entry costs. Property’s are much higher, unless you can get first homebuyer concessions. (More on the important and expiring HomeBuilder consideration in a sec too.)
But you should buy a property – as a single-asset investment – only when you are ready, not when you are rushed. As may be the case now.
Meanwhile, shares – where it’s possible to diversify widely to minimise your risk – you should start cautiously buying today.
Let me explain.
What you need to know about COVID economy property
Right now, there are huge incentives to buy new developments or to renovate your existing home.
The HomeBuilder scheme aims to prop up the building industry with a $25,000 cash grant for people who buy or build new homes, valued at up to $750,000, or who renovate to the tune of $150,000 or higher.
The grants are available to Aussie singles who earn less than $125,000 or couples who earn under $200,000. You must have contracts signed by December 31 and work must commence within three months.
First homebuyers also have existing concessions and incentives available to them, which differ by state (particularly if you buy a new property). But it may well be, if you keep under that same $750,000 price point as HomeBuilder, that you can avoid stamp duty altogether. This is one of the biggest expenses of a new home.
The other large expense is lenders’ mortgage insurance, and there are ways to avoid this now, too.
Firstly, there is the government’s first home loan deposit scheme, which allows you to buy with just a 5 percent deposit, instead of the normal 20 percent that is usually required to avoid lenders’ mortgage insurance. You borrow 95 percent and the government guarantees you for the 15 percent extra you need.
However, I urge caution on that one at the moment. Five percent is not much of a buffer if property prices temporarily fall on the back of the coronavirus economic hit. And you’d find yourself in negative equity – owing more than you own.
There is also an interesting product, though, from St George, where you only have to pay $1 in lenders’ mortgage insurance with a deposit as low as 15 per cent.
But, in an ideal world, a 20 percent deposit gives you a great margin of safety. If you have such a deposit, have been thinking of buying and could access home builder and the other concessions, then now could be a good opportunity.
If not – as I said earlier – the time to buy is when you’re ready, not rushed. It’s too big an investment with, if you don’t have enough of an equity buffer, today too much risk.
What you need to know about COVID economy shares
The swings in the sharemarket – as it reacts to the rollercoaster news flow – have been extreme. The so-called fear index over the U.S. S&P500, the CBOE Volatility Index (VIX), hit highs on worldwide lockdown in March above those seen on the global credit crack-up.
It has since eased but you’ll have noticed big day-by-day bounces regardless, in both directions, on the sharemarket. Having said that, since early June, our top 200 shares have effectively traded sideways.
To invest in stocks more safely, you need to invest small amounts of money, regularly. By doing this, not only will you get exposure to the more stable trading environment today, you can also take advantage of any return to volatility.
A concept called dollar cost averaging basically refers to the fact you get more shares when prices are low, so enjoy a bigger portfolio boost if/when they push up.
This also saves investing a lump sum when it turns out the market is at a high point, and subsequently falls.
But if you’ve never invested before, how do you get started? To obtain the diversification that I said was key for safety earlier, exchange traded funds are great… especially so for novice investors.
These ‘ínstruments’ trade like shares – you buy bits or shares of the fund through an online broker, and then these move up and down in value based on investor sentiment.
The beauty is you can buy exchange traded funds that cover an entire sector or even index like the ASX200. So you get to – at very low cost – spread your money across far more stocks than you could afford.
Pick the market or area of the market you think might recover the quickest from COVID craziness, save $500, invest and repeat.
The time to start saving and investing – with small, regular amounts – is immediately.