Hatching home strategy

Q: I am a 27-year-old and live at home. I have a good job and am able to save $350 a week. My concern is that, although I have $40,000 saved and have been enjoying good returns on managed funds - which include New Zealand shares, international shares, a property trust and a compounding bank account - home ownership is starting to become unobtainable.

Will the housing market outstrip my savings effort or should I stick to my guns with the view that a large deposit will allow me to avoid the pressure of a large mortgage?

A: You're in a strong enough position to get into the housing market today.

With a $40,000 deposit, you could get a $100,000 apartment. Your mortgage payments, on a 25-year 8.5 per cent loan, would be $483 a month. That's much less than your current savings - although it might not be so easy to save away from your parents' place.

But would it be wise to buy or should you wait a while? This is a tricky question for two reasons:

* Nobody can accurately forecast growth - or losses - in housing prices, shares or property trusts.

* If you decide to buy a property, it will be with a mortgage. And whenever you borrow to invest in anything, you are gearing. So we need to compare ungeared savings with a geared house.

When an investment goes well, gearing makes it even better.

If you earn 10 per cent on $40,000 of savings, you have gained $4000, but if the value of your $100,000 apartment grows 10 per cent, you have gained $10,000. The extra gain comes from growth in the bank's money as well as yours.

That means that even with slower growth in the housing market - say 5 per cent or $5000 - you might be better off than with faster growth in your savings.

Sounds great. The only trouble is that gearing also makes a bad investment worse.

If your $40,000 savings drops 10 per cent, you've lost $4000. But if apartment values fall 10 per cent, you've lost $10,000.

In the old high-inflation days, when we could be confident that housing prices would continue to rise, you didn't need to worry about the second scenario. But quite a few economists predict at least a flattening, if not a fall, in house prices in the next year or so.

You'd probably feel quite sick if you buy a place now and then find in February next year that you could have bought something similar for considerably less.

Still, it wouldn't be a disaster.

Assuming you plan to stay in the housing market - either in your first property or in something better later on - the value of your home is certain to rise over the years.

It's not clear, then, what is your best option financially. So what should you do? Whatever you want to do.

If you enjoy living at home - and your folks enjoy having you - hang in there for a while. You're saving lots and it seems unlikely that house prices will continue to grow at too mad a pace.

If you would really like a place of your own, go looking. With the property sales pace slowing, some sellers are probably getting anxious and you might be able to drive quite a hard bargain.

Whatever you do, I suggest you resist the temptation to look back to see if you would have been better off taking the alternative. Life is too short for that, even at 27.

Q: I am a single, 35-year-old female and my dream is to buy my own house. I spent my 20s travelling and my early 30s acquiring stuff. Now I have decided it is time to knuckle down and I have saved $15,000 in nearly four months.

What should I do with my money while it is building up into a house deposit? Are term deposits the best way to go or do you have any other recommendations?

A: Anyone complaining about the irresponsibility of youth should read today's column. Our first correspondent is an impressive saver. You are phenomenal.

The two of you are in similar situations, but you've zeroed in on a different issue - although it is one that is also relevant for him.

What you should do with your savings - and this also applies to saving for anything else, such as travel or retirement - depends on:

* When you expect to spend the money and how strict that deadline is.

* Your tolerance for volatile investments.

If you don't expect to buy a house for 10 years or more, and you can cope with up and down values, I suggest that you save in diversified shares or a share fund. That's most likely to give you high average returns over the years.

If you're likely to buy property in the next year or so, you should stick with term deposits. There's about a one in three chance a share investment will lose value in a year - and that's too high.

In between one and 10 years, it depends on personality. Let's say you are a bit of a gambler. If you could shrug off any losses and delay the house purchase for a while, you could save in shares or a share fund even if you expect to buy in just a few years.

Note, though, that more people think they can cope with a declining sharemarket than do actually cope.

Picture the value of your $50,000 of share fund savings dropping to $30,000. Would you hang in there?

If there's a danger you would buy high and then sell low, stay away from shares. That doesn't necessarily mean confinement to term deposits. They're good for one-year or two-year investments. But beyond that, it's probably worthwhile to go for the somewhat higher returns you can get on high-grade fixed-interest investments such as corporate bonds or debentures.

Avoid lower-grade products, though. A default could prove more disastrous than a share crash.

A share broker or financial adviser can help you choose higher-quality fixed- interest investments.