Kim Macdonald: You may be treading water financially despite property boom profits, so how do you get ahead?

If I had a dollar for every time I’ve heard someone say Perth is in a profitless property boom, I’d be a millionaire. Or I’d have enough to buy a median-priced house. Same same. We all know that while our homes have gone up in value by ridiculous amounts, so has every other property in WA and, for that matter, across Australia. Which means most people are treading water financially, because many could barely afford to buy their own house back after forking out for sale costs and stamp duty. But the reason why the hoi polloi believe it to be a profitless boom is because most people are not doing anything with their capital gains. As property expert Gavin Hegney points out, Perth is, on the whole, failing to engage in the second part of the boom conversation. And that is the part where you figure out how to use it to get ahead. The unique thing about this boom, as Hegney points out, is that home-owners across the socio-economic spectrum have the chance to get ahead. Given it’s been relatively more pronounced at the cheaper end, lower income-earning homeowners now have hundreds of thousands of dollars in equity — perhaps for the first time in history. Armadale homeowners, for example, have probably never before had access to $300,000 to $500,000 in capital gains — as pre-2020 buyers do now. So what can home-owners do with these capital gains? Options fall into three main categories. A) Do nothing — which is what most people are choosing to do, or B) Refinance to enable the withdrawal of money to pay for luxuries like holidays and fancy cars — an ill-advised but distressingly popular option. Only the following option has the potential to really help you take a financial step up in life. C) Refinance to withdraw tens or hundreds of thousands of dollars from your loan to invest elsewhere. Mr Hegney says those using professional advice are likely to get ahead, while those who chase the latest get-rich-scheme probably won’t. A typical broad‑based diversified investment fund in Australia typically earns 7 to 9 per cent over the long term, according to AustralianSuper. This means that for every $100,000 you invest at 7 per cent interest, the amount doubles in 10 years and nearly triples over 15 years, after fees and charges, but before tax. In other words, at 7 per cent interest, a $100,000 investment will grow to $196,000 over 10 years or to $276,000 at the 15-year mark. If you put $100,000 on your mortgage, at 5.5 per cent interest, and pay it off in full in 10 years, you will fork out about $130,000 over 10 years. A 15-year loan term will cost you about $146,000 in total repayments. This means, a broad-based fund with a 7 per cent return will have an expected profit of $130,000 in the year 2041, after repaying the loan but before tax. Please bear in mind that a 7 per cent return is not a low-risk investment, so there is potential to lose money. To fall into the low-risk category, you can expect a return between 4 and 6 per cent, usually in the form of a term deposit, government bond or a high quality corporate bond. For those who want to stick with property investments, Melbourne is probably a better bet than Perth, given it’s currently the cheapest major market in Australia. As Hegney explains, the Australian property market eventually always returns to its norm, which means Melbourne is due to resume its position as the second most expensive city in Australia at some point in time. Perhaps they will come to dread West Coast investors the way we do East Coast investors. Gold is also a popular option, as we have seen from the queues of people at Sydney’s Martin Place to buy gold bullion. Many economists remain bullish about its prospects, even after its recent rally. But the fact Central Banks are investing heavily in it signals the market expects economic instability and turmoil in the short to medium term. So be careful not to refinance your mortgage to an extent that you risk losing your house. It may feel like a profitless boom, but the paradox is that losing your house will kill the goose that lays the golden egg.