Can you side hustle your way into the housing market?

Uber is my weakness. Sometimes you just need to be there quicker than the bus can get you there. Sometimes you’ve had a couple beers and can’t drive. Sometimes it’s just easier. Sure, it’s usually a lot more expensive. But quite often the conversation makes it a bargain.

In the past year or so, I have been driven by a guy who used to travel Pakistan photographing the test cricket team. A guy who fled Yugoslavia for Sydney just as things were getting messy. A guy who went from packing bags at a corner shop to owning one in five years. And a guy who used to be a writer but is now a spirit medium.

My journey across town the other day was similarly interesting. Not because the driver had a crazy life story but because he is using Uber to move closer to a major financial goal.

$1000 a week from driving strangers

My driver was 29 years old, just like me. He finishes his “morning job” at 3pm, drives Ubers for two or three hours around peak time every weekday, and drives a bit at weekends too.

Being nosy, I asked how much the side-hustle nets him. He said his target is $1000 per week after Uber takes its 30% cut. After petrol and insurance costs, it seems to me that $1000 of profit would take quite a few hours to achieve. But for the purposes of this article I’ll take his word for it.

Even after the other tollbooth operator – the ATO – takes its pound of flesh, that’s a decent chunk of money. Especially as I already knew that the “morning job” he talked about was a good gig in facilities management.

For that reason, I continued the interrogation and asked what he did with the extra cash. Did he use it to fund a hobby? To take nice holidays? As it turned out, he had big plans for the proceeds of his side-hustle: he is saving to buy a house before he is too far past 30.

“If you want something, work for it…”

It’s no secret that housing affordability in Australia, and especially in Sydney, is a big issue for most people. It’s not a perfect measure, but the chart below shows the value of a median house as a multiple of median salary over time. Spoiler: it’s a lot higher than it used to be.

A common response to data like this (usually from those that already own a home) is that housing has never seemed cheap for those buying their first property. And that if you really want one, you just need to work hard and make it happen.

My driver is clearly taking that to heart and putting extra hours in. But how realistic is it that he’ll get there, how long might it take, and what routes might he consider? The first thing we need to consider is the amount of savings he might need to target.

How much do you need to buy a house in Sydney?

My driver mentioned that he definitely wanted a house versus an apartment. He also mentioned some suburbs out west near the new airport. A look at prices in some of these suburbs showed that $1.2 million would get you a perfectly nice place.

A lot of people immediately set 20% - the lowest deposit percentage you don’t need to pay LMI on – as their goal for the upfront costs. But as my colleague Shani showed in this article and video on the real cost of buying a first home, this will likely be a lot higher due to stamp duty, professional fees and other costs.

I used a calculator from ANZ and found that you can expect around $50,000 of extra costs (on top of your deposit) on an existing house in NSW bought for $1.2 million today.

Figure 2: Up-front costs (on top of deposit) of a $1.2 million house in NSW. Source: ANZ calculator

Shani’s experience suggests that number may be on the low side, but let’s run with it for illustrative purposes. Adding that $50k to a 20% deposit would bring the total upfront costs on a $1.2 million property to $290k.

If my driver meets his $1000 a week goal and takes four weeks off per year, 48 weeks of $1000 a week at a 30% marginal tax rate would net him $33,600 annually in extra income. If he saves all of that, he could hit $290k in 8.5 years without saving more from his day-job.

Accounting for inflation in home prices

These numbers, however, ignore something very important. The target we established was $290,000 in today’s housing market, not $290,000 in the housing market X years from now.

Those saving for a house might hope for a flat or weak housing market during the period they are saving. But building such an assumption into your plan would be exactly that – hope. It’s better to plan for the worst and hope for the best than be too optimistic and end up disappointed. So we probably need to adjust that target amount for inflation.

Here is how 4% annual inflation in home prices (and other up-front costs) impacts how much you’d need to replicate the purchasing power of $290,000 today in future years. When you are dealing with numbers this large, even a small annual rate has a big effect on the dollar amount needed.

We initially pegged 8.5 years of saving to hit the target. But if inflation averages 4% per year for that long, he would be more than $100,000 short in real (inflation-adjusted) terms by that point. At a $33,600 savings rate, the time needed to hit the target stretches to around 14 years.

What can be done?

So we have arrived at a target amount and we have adjusted it for reality a bit. The last adjustment we made – factoring in higher prices – shows how much harder this makes it to achieve your goal in a reasonable timeframe.

This influenced how I looked at the assets I might consider to help me towards a similar goal. My first thought – before running through the inflation exercise - was term deposits, which lock up your money with a bank for set period and pay you interest.

A quick scan of rates available from my big four lender showed that I could lock in 4.35% for one year or 3.5% per year for five years (bear in mind that the 3.5% wouldn’t compound every year).

On the bright side, your nominal return from term deposits are risk-free thanks to government guarantees. The only risks are that inflation outpaces the growth of your money, or that interest rates fall and you can’t reinvest at the rates you wanted to reinvest at.

If the 4% house price inflation we have included in our goal is roughly correct, though, you would need to consistently lock in higher term deposit rates than that to save time on your goal. History isn’t your friend here – and the bank’s lower rates for longer deposits show which way they think rates will go.

Let’s assume you manage to get 3.5% per year and roll your money over every year. My numbers show it would take you about 11 years (contributing on a quarterly basis) to save the required amount pre-tax.

Going with term deposits, then, might offset some of the damage of 4% inflation. But it probably wouldn’t offset it all, or get you to your goal that much faster.

There is still no alternative?

The only way to get there faster then, would be to achieve a return above inflation. Given that a reasonable time horizon might be approaching 10 years, a low-cost equity index fund might be a viable option.

The obvious downside here is that stock markets don’t always go up. The prospect of greater potential returns is mainly a result of taking higher risk. Over longer holding periods, however, there has historically been a lot more risk in leaving your money to sit around and lose its purchasing power.

In 2018, Fisher Investments published the table below on the percentage likelihood of receiving a positive return from the US’s S&P 500 index over different holding periods:

Over 20 and 25 year holding periods, the index would have generated a gain 100% of the time. Cut the timeline to five years and there would have been an overall loss 12.5% of the time. Cut it further and the chances of a negative return keep rising, up to roughly 25% for a single year.

The data above obviously considers the US market as opposed to the Australian market. It doesn't consider how expected future returns are impacted by starting valuations, either. But if the goal has been inflation beating returns over a long-ish time horizon, stocks have generally been the way to go.

Banking on getting a X% average return has its issues. After all, there is a very real chance that you could get into year 9 of your plan and experience a 20% fall in the value of your portfolio. Nonetheless, you need to assume something in order to make a plan. So let’s assume a 7% annual return.

Saving $33,6000 each year (invested quarterly) with an average return of 7% would see the balance grow past our inflation-adjusted target 9 years in.

By this point, we have mapped out three potential paths to the goal based on my driver’s Uber income:

14 years of savings in cash with no return
11 years of investing in 3.5% term deposits and rolling them over each year (pre-tax)
9 years in equities with annual return of 7% (again, pre-tax)

The relatively small amount of time you save by earning double the return on your investments sticks out here. It shows that when you start from zero, the amount that you are saving is by far the biggest contributor to the growth of your balance. Compounding takes a long time to get going.

The timelines above do not account for taxes that you would need to pay on interest income or capital gains generated. These would reduce your balance and therefore make it take even longer. And let’s remember, the timelines above stem from a very aggressive amount of monthly savings.

Comparing that rate of saving to my own income makes that second point clear. I earn an above average salary and feel very fortunate to do so. Yet saving $33,600 per year like my Uber driver hopes to would be impossible t would be almost half of my after-tax pay. With my rent and other outgoings being where they are, I find it hard to sock away 20%.

Even if I did make the sacrifices needed to reach that level of savings, I would still have many, many years of hard graft ahead of me before having enough to buy a house. And we have only looked at affording the down-payment!

One estimated monthly repayment I saw for an 80% LTV mortgage on a $1.2 million property was $6284. If we use the rule of thumb that mortgages expenses shouldn’t surpass 28% of your gross salary, the lender would need to be raking in over $260k per year.

That’s a lot more than me and my partner’s joint income, and – just a guess – it would probably be a stretch for my driver too. I came away from this exercise with four main takeaways.

First, an admiration for those working like dogs to get closer to goals that seem a long way off. Second, skepticism that buying a house is worth the sacrifices we’ve mentioned versus renting in area you love and enjoying the present a bit more. Third, a renewed respect for how damaging inflation can be to your goals. And finally, a desire to tell the next person who says “just work harder and make it happen” to buy a calculator.