Building wealth outside home ownership

One of the greatest investment debates is whether you should invest in property, shares or more recently, exchange traded funds (ETFs). Search online and you’ll find plenty of articles making an argument for which asset type has performed better over the past 10, 20, 30 years or longer.

Often the result comes down to how the data is sliced (for example, whether dividends or tax implications are included) and which periods are being compared. In general, Australian property and sharemarket performance tracks each other relatively closely over the longer term(1).

Putting aside performance figures, the Australian dream of home ownership and investing in property is still alive. The Australian Bureau of Statistics says two in three Australian households own their home – either with a mortgage or without, and the ASX’s 2023 Australian Investor Study says one in five adults (19%) choose residential property as their first investment(2).

At the same time, for those who don’t yet own a home (typically younger Australians) attaining that goal has become more challenging than ever. Housing affordability in 2024–25 is at crisis levels after years of surging prices. For example, in New South Wales the median house price climbed 99% from 2014 to 2024, while average wages rose only 26% in that period. Nationally, home price-to-income ratios have blown out to around 10 times annual income, compared to about 3.5 times a few decades ago(3).

The deposit burden is immense: a 20% deposit for a home with Sydney’s median house price, A$1.6m (plus stamp duty and fees), can easily require A$300,000+ in cash, an amount that could take many years to save for the typical household. The Grattan Institute estimated that a dual-income couple would need more than twelve years to save a 20% deposit for a A$1.6m house. It’s even harder for single buyers juggling rent and rising living costs. It’s no surprise that the age of the first-home buyer is rising – about one in five first-home buyers is now over the age of 40 – and many young people feel locked out of the property market(4).

This affordability crunch has forced younger generations to look for alternative ways to build wealth outside of home ownership. Many are turning to the sharemarket as a more accessible path to grow their savings, given the sharemarket’s relative liquidity and lower barriers to entry.

ETFs: The new home for investments

For our grandparents and parents, the family home was the primary asset in which Australians invested to grow their wealth. Today, there are more alternatives providing access to a range of wealth building investment options, and ETFs are a prime example. ETFs have given Australian investors the opportunity to invest in assets that were once the domain of institutions and the ultra-rich.

The popularity of ETFs has surged in recent years, especially among younger investors. The 2023 ASX study found that one in five (20%) Australian adults currently invest in ETFs, up from 15% in 2020. These same ETF investors also have a median portfolio of $46,621 and median age of just 28, reflecting the strong take-up by younger generations.

The study also revealed that younger Australians are more likely to invest in ETFs, with 33% of Generation Z investors owning at least one ETF in their portfolio, while 29% of Generation X and Y were also invested in at least one ETF. By contrast, pre-retirees (13%) and retirees (9%) were least likely to own any ETFs.

Since the beginning of 2021, an investment of $100,000 in the S&P/ASX All Ordinaries Total Return Index (i.e. the entire Australian sharemarket) would have grown to more than $135,000 as at 30 June 2024(5). It becomes easy to see why Australians attempting to accumulate their first home deposit would access the growth potential of the sharemarket, and given the cost-of-living crisis, sticky inflation and increasing house prices, it is even clearer why younger Australians are looking to other sources to build their wealth.

Good homes need investment in solid foundations

There’s no question that home ownership and property investment can be an expensive, long-haul exercise. Buying or selling property often incurs significant costs (think deposits, stamp duty, legal fees and more) and usually involves concentrated bets on a single asset. It can take many years of price appreciation to see substantial returns, and in the meantime you’re potentially holding an illiquid asset in a market that can be slow to navigate.

If you need cash in a hurry or want to rebalance your investments, you can’t easily sell off a portion of your house – whereas you can typically sell stocks or ETF units within days. This isn’t to say property is a bad investment (far from it, as history shows), but it underscores that property usually requires patience and locking up a lot of capital in one place.

By contrast, the beauty of shares and ETFs is their low barriers to entry and high liquidity. Other than the cost of a share or ETF unit, there is often no strict minimum investment – and you can generally buy or sell your investment on the market at the time you need funds. With ETFs especially, investors can have access to a universe of domestic and global companies, asset classes and strategies all in one trade. This means it’s straightforward to build a diversified portfolio aligned with your goals, without needing large sums or specialised knowledge of individual stocks. In short, ETFs can offer a flexible, scalable foundation for growing wealth, however small or large your starting amount.

It’s widely understood that investing in ETFs can help investors generate capital growth and, in some cases, even provide a stream of income. Many ETFs pay regular dividends or distributions (for example, those holding baskets of dividend-paying stocks or bonds), which can be reinvested or used as income. Over time, the combination of compounded growth and reinvested income can significantly boost an investor’s net worth – without the need to take on debt or property maintenance costs. Of course, like any investment, ETFs and shares do carry risk, and markets can go down as well as up in the short term. But for individuals with a longer time horizon, a well-chosen diversified portfolio, and ETFs in particular, can form a solid foundation for wealth-building outside of the family home and help to build a platform for future wealth creation.

The growing popularity of ETFs in Australia is attributed to their liquidity, diversification benefits, ease of access, cost-efficiency, and the opportunity to explore various markets and asset classes. Whether you are a new investor or a seasoned one, ETFs offer a user-friendly and versatile investment option to meet your financial goals.

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