Are you making a mistake saving your money?

Sentiment in the property market, just like prices is very much cyclical. Back in 2021, property prices were flying and everyone was extremely confident and happy to be buying.

Fast forward to today and 12 interest rate rises later and confidence is not quite what it was before. People are hesitant to buy, while some simply can’t afford to buy. 

At the same time, with interest rates now at a more normal level, saving your money is now looking a lot more appealing. It’s possible to put your money in a savings account and earn more than five per cent interest, which is something that we haven’t seen for many years.

However, if you’re out there trying to save, you will still very likely be losing ground.

One of the most powerful parts of investing in property is the leverage that you have available. Depending on your personal situation you might be able to access LVRs of more than 90%, which means you don’t need all that much money to control a very expensive asset.

When you combine that leverage with the capital growth that comes from owning high-quality assets and you can quickly see why savers are simply going to be left behind.

Even in the current market cycle, we are still seeing property prices grow in value. Last month, values in Sydney increased 0.9%. For a property that is worth $1 million, that means the growth is going to be somewhere around $9,000 on average in dollar terms .

When you look at this from a perspective of trying to save, then it’s very difficult for most people to match that level of growth with what they are capable of saving. To save $9,000 in a month after tax, would be a challenge for many people in a place like Sydney where costs and living expenses are high.

On the flip side, if you are able to put down a modest deposit and own a $1 million asset, you just saw the value of that asset increase $9,000. And you didn’t have to pay any tax on it.

The other thing to consider when owning property is that growth will often come in short sharp bursts. If you think back to what played out over 2020-2022, we saw values of some properties increase by upward of 50%.

That means that properties that were worth $1 million grew to over $1.5 million in just a few years. Again, if you compare that to what you are capable of saving then most people wouldn’t be able to get anywhere near that.

Now I’m not saying people shouldn’t be saving. The first part of building any type of wealth is through managing your own money effectively and that means spending less than you earn. To the point that you actually do have money going into your bank account every week and staying there.

But the second and crucial part is that you need to be doing something with that cash that is going to see it increase in value over time. If it’s sitting in the bank and earning 5% interest, it’s still losing value given that inflation is running at over 6% per annum.

That’s why property is so powerful. If you’re just saving, you’re falling behind. You need to start investing, to not only protect your wealth but also to grow it.

If you are interested in the above, feel free to reach out to a Henderson buyers agent today for more information.

 

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