By David Hargreaves
Soaring numbers of young Kiwis are now raiding their retirement savings to climb into a rapidly inflating housing bubble - and the Housing Minister thinks this is a good thing.
I try to not be surprised by anything, but I was astonished when Nick Smith came out over the weekend applauding the fact that close to 11,000 young New Zealanders had cashed in KiwiSaver retirement savings to buy houses in the past year.
This to me is the clearest indication so far that this Government is actually keen to foster a housing bubble.
When all is said and done, if house prices keep surging the way they have recently for the next couple of years, everybody will feel wealthier and happy and they won't be inclined to vote for a change of Government.
This on the part of the Government is absolutely reckless short-termism at the expense of the future of the country.
Here is a quote from Nick Smith that demonstrates his attitude: "My message to young people aspiring to own their own home is that KiwiSaver works. It is a very positive result that to date the initiative has provided NZ$217.6 million of people’s own savings and government grants towards the purchase of a first home."
Now some of us thought that KiwiSaver was designed for New Zealanders to provide for their retirement. But just in case any of our young were under such misapprehensions, here we have a senior representative of the Government telling everybody it is a good thing to pull money out of a diversified investment plan that's aimed for their retirement and plonk it into property.
There are two distinct problems here. On the one hand there is the riskiness of people withdrawing long-term eggs and putting them into the housing basket.
On the other hand there is the fact that the poor old Reserve Bank is straining to put out the housing market fire, while the Government - judging by Smith's words - is pouring petrol on it. Remember too, that Prime Minister John Key has already demonstrated that he is at odds with the RBNZ over its plans to introduce "speed limits" on high loan to valuation lending. Key thinks first-time buyers should be exempt. The RBNZ doesn't want exemptions. See here for all our articles on the RBNZ's new "macro-prudential tools".
It appears to me that the RBNZ is going to have its work cut out reining in the housing market if it is actively working against the wishes of the Government. I would suggest the battle (both against the housing market and the Government) is already close-to-lost for the RBNZ and we are already heading for interest rate hikes that will be sooner (my guess is before the end of the year) and bigger than most people currently anticipate.
And as the RBNZ tries to play catch-up with the rising housing market and ensuing inflation, who will suffer most? Why the people who grabbed every cent they could and put it into a first home of course. They will be the ones most slugged by higher interest rates.
Clearly for some people, particularly the very financially disciplined ones, dragging a lump sum out of KiwiSaver now and putting into a first home will work. But for the less disciplined, who will be swapping a lump sum of savings for massive debts, there will be trouble ahead.
Even the young people who will do okay out of buying a first home now should consider the fact that by dragging say NZ$20,000 out of KiwiSaver now they will be reducing the cash pile they get from the scheme upon retirement by probably a six-figure sum, such are the ways of compounding interest.
KiwiSaver has been a very welcome addition to the New Zealand landscape. Anything that encourages financial literacy is good. Anything that encourages Kiwis away from the state-of-mind that says housing is the ONLY investment is good also.
Now we have a Government saying, in effect, don't worry about diversifying your investments, just chuck all your assets into property. This will not end well.
63 Comments
Point is the Kiwisaver balance for many young persons includes a nice lot of government contributions - 'free' money, if you will.
Problem with using this 'free' money to borrow when one already has an existing student loan debt is that when/if circumstances dictate and things get tight in terms of future finance - the 12% of salary deduction for the remaining student loan balance will be a killer. Indeed it is likely one of the main reasons why those with student debt are unable to save the deposit needed for a house - and hence have to 'borrow' that deposit from their retirement fund.
And I'm also quite certain that a future government will restore interest on student debt in future as well. It's inevitable.
Given in the past tertiary education for those capable was free anyway - it seems only right that today's students should similarly be able to use this 'free' money from government that is part of their Kiwisaver account to pay down debt - as opposed to take on more!
context?
kiwisaver with the Govn payout should be making money, v the non-urgency of slowly paying off an interest free loan.
I wonder what Govn would actually try and put interest on a student loan? political suicide I would think....but then the future could hold anything.
regards
I wonder what Govn would actually try and put interest on a student loan? political suicide
Hardly;
What makes you think we're different?
Here though its 0%...if we had 3% and someone said 3.5%....not such a big thing I suppose.
a) we are not the USA, even that piece hints at grid lock on what to do from both parties.
b) "Free" loans have been quite a big issue in past elections here in NZ.
c) Because we are different in outlook to the US...Im not saying its impossible...just I'd see it in a BAU context as highly unlikely.
Knowing the future is however going to be tough...who knows. Mind you interest rates are going to be low in a depressed economy...the ability to pay also depressed however.
regards
What makes you think we're different?
We're a welfare state, the USA is not.
Unfortunately interest-free student loans and working for families are two programmes that are now politically impossible to get rid of. NZ voters love their welfare, and no party would be foolish enough to take that candy away.
.. no party would be foolish enough to take that candy away.
The degree of our welfare stateliness is merely a product of the tolerance of our international lenders. I'd have thought that enough had been written about the fact that we haven't paid our way in decades for the majority of thinking/reading people to understand this.
We are living on borrowed time on borrowed money.
Interestingly so is the entire world. The debt world wide can never be re-paid there isnt the energy to support a big enough world economy to do so, ergo, default.
Im also not so sure on the tolerance bit...ie I dont think its a Q of the lenders worried about "their" money, its not "their" money in play. Most of it is loaned off the Fed virtually free and lent out on a margin, the bigger the better....
So really that lending as the developing countries are finding out leaves because the Fed might want it back, or some other preceived risk suddenly got un-acceptable....the national economy it was lent into hasnt changed.
regards
The debt world wide can never be re-paid
Perhaps not - but the possessions attached to that debt will most likely be repossessed - unless the correction comes about as an international form of debt jubilee which extends all the way down to the debt peasants of modernity, but that I doubt.
Then again, one can't repossess an education - but that won't stop the collectors coming after your fridge :-) and in future I could even foresee the debts of a parent being "inherited" by their decendants. Point is - when there is nothing to pay workers with - work still needs doing - and history has often shown that it gets done by enslaving the workers through debt.
Hence, I'd suggest the middle classes get out of debt before the period of repossession really kicks in.
Because a US graduate can't jump the border and get a 20%+ income rise and still be able to pop home for weekends with reasonable frequency, whereas a NZ grad can. Currently if you stay in NZ you pay no interest and that partially balances out the huge earning disparity. Take that away and watch even more grads catch the tin bird out of here.
Which leaves behind those that didn't graduate (or graduated with degrees in fields with no demand). Low income earners who will never earn enough to pay off the loan at the minimum repayments. A generation of service/retail staff with a lifelong millstone around their neck.
And as steven said, political suicide. I can't find the number of people who are still in some stage of paying off a student loan, but I bet its a significant portion of the under 30s population. That is a lot of voters to ostracise.
That is a lot of voters to ostracise.
A very odd thing about Western democracy is that the most ostracised/downtrodden in society typically don't vote! Witness the recent by-election for the Maori electorate, witness the largely no-contest in many of our local body mayoral elections.
I find it astonishing but perhaps the more hopeless one's prospects are in our Western way of thinking - the less able one is to imagine a different/brighter future. And of course enough crumbs get tossed out by the incumbents (accommodation supplement, free Drs visits for under 5s etc) such that the impoverished actually feel thankful - missing the whole point that whilst the crumbs kept coming, GST also went up :-).
I think your post shows you are a bit out of touch with reality. Buying one house is hardly Asset rich. At least one property (either owner occupied or rental) should be part of any diverse investment portfolio. Not sure what stats you are relying on when you state people are taking this debt on top of existing debt?
If a couple managed to find a property using the subsidy (5k *2) their mortgage payments would almost certainly be far lower than their current rent - enabling them to either pay down the mortgage rapidly or make other investments/savings.
I think your post shows you are a bit out of touch with reality. Buying one house is hardly Asset rich.
When the only asset you have is that one house - and the only income you have is the government super - then indeed for the individuals concerned, from their financial point of view - they are asset rich and income poor.
And the reality associated with the number of old folks in this very situation is demonstrated in terms of the existence and take up of the Rates Rebate Scheme in local government. It wouldn't be there is it weren't for the fact that these folks are so desperate that they need it.
No, I think they should have the choice of either making a withdrawl from k/s to borrow OR to pay down debt. Presently, all you can do is withdraw to borrow .. when the greater advantage for many young families would be to use the contributions from others to pay down debt.
Why should the taxpayer subsidise a home mortgage?
Point is the government 'gave away' our money as an incentive to get folks to save for their future - my point is surely the best way to plan for your future is to plan to be debt free during times of financial instability/crisis?
You seem to be seeing a mortgage as nothing but a debt burden. It is of course a financial obligation, but the fact is that you have to pay to have a roof over your head one way or another anyway.
If you don't take on a mortgage, then you will have to continue to pay for that roof, in the form of rent, for the whole of the rest of your life. Is that really such a great plan for your future?
If you do take on a mortgage, then your future contains the prospect of not having to pay for the roof over your head and owning a valuable asset.
There seem to be a % of ppl living in relatives garages. These are invariably I'd suggest the poorest paid. This group invariably get hit hardest in times of recession...so wont be able to pay ever increasing rent/costs at the least.
Other examples of this abound, for goods yet landlords seem to think that they can get huge increases in rent. I think a classic was a petro-chemical company increasing its prices 8%, it lost 7% of sales and they back peddled, fast. Ditto petrol/diesel when it got to $147USD, ppl stopped using diesel powered flourmills and went back to doing it by hand. Ppl quiting jobs because the price of petrol made it impossible to commute. So they drop out of the system a long way, potentially, so yes I think there is potential for renters and others (the highly leveraged mortgagees) may well simply stop paying....
regards
Technically no. My brother had a rental during the long crisis in RE in the US. Over a 3-4 year period he had one renter after another - move in make the first payment - then trouble. Lots of chasing, lots of promises, lots of drip feed/part payments, lots of admin/legal action eventually to evict. Rinse and repeat a number of times over- all the while also trying to sell the property in between tenancy defaults. The defaulting tenants weren't awful, no hopers - just desperate families in the main, many of whom had lost their own homes and were without stable, full time work.
Why people just think it can't happen here is beyond me.
I did mention the govt subsidy hence the cost of the house would be rougly 350k after deducting subsidies and deposit/kiwisaver withdraw - which would be about 330 dollars per week at the current interest rate. That is below what quite a few houses in working class suburbs rent for. The higher the price typically results in a lower yield.
But at that lower end, you forget that the accommodation supplement pays for much of whatever the rent might be over and above what is deemed affordable based on income. And as rents rise against a 'flat' or reduced income - the supplement also increases. This (at the moment) is far less risky for lower income households than ownership and generally less costly as well.
I'm guessing the only reason speculators still buy these properties for rental purposes is based on tax deductability of certain expenses (such deductions not available to owner occupiers) and anticipated capital gains. And its also why so many who went down this path keep adding to their portfolios - as unless you play the numbers game there is never any realisable take home profit in it. In other words, the lower end landlords keep striving to get to a time when they can live off the rental income without having to realise the capital gains. And for many the gains will never be there, indeed instead there will be massive losses as regulators catch up with tagging P labs on LIMs, implementing WoFs for rental properties, cutting back on the a/supp and the like.
Assuming $400k house, $350k mortgage at 5% gives $336 per week for the mortgage + $30 rates +$4 fixed water charges + $12 house insurance. Total = $382/week.
Maintenance at a low 1% of purchase price per year adds a further $77/week to give $459/week out of pocket. You can get a rental much cheaper.
Assuming there is an economy in 30 years time then you would be better investing the difference which will give you twice the amount the house is worth after adjusting for inflation.
However, you are more likely to end up with a debt you can never afford to pay, your house and all other assets seized to cover it.
Better to have a liquid asset as you can easily sell it at the first signs of trouble. You could even use the money to buy a mortgage-free property from a distressed seller.
If you are deep in debt on an overpriced house, the debt will follow you even after you sell the house, thanks to the joys of leverage.
(Very) rough calcs - about 20,000 members have taken a withdrawal to buy a home. That's 1% of all KiwiSaver members.
To date, $217m has been withdrawn for this purpose. I think there's about $17bn in KiwiSaver overall. So that's about 1.3% of all KiwiSaver funds under management.
The facility has been available for three years.
Just some perspective to cool down an over-excited Mr Smith.
The govn has promised a balanced budget in 2014. Given there isnt much else on the horizon to,
a) boost its tax income.
b) Provide jobs.
c) improve feel good factor, hence spending.
get them/us there and hence, them re-elected its hardly surprising they are porking anything they can find.
When the bubble pops they'll rue this day....unless if they are in opposition then they will make a meal of it....
Strange how the right seem to think they deserve the mantle of competant economists.
regards
"Now we have a Government saying, in effect, don't worry about diversifying your investments, just chuck all your assets into property. This will not end well"
Well, as I remember it, the National Party was all sour on the whole KiwiSaver idea at the get-go, due to it being a Labour led initiative, and poo-poo'ed it all the way along. It then changed it tune towards 2008, when realising it had growing popular support. When in power, from there it picked it to bits, reducing the planned contribution rate increases and tax-payer subsities, making what was a good deal for Joe Blow tax payer, into something more marginal. The fact that the National Govt seems keen on members cashing out and buying houses doesn't really suprise me, given their history.
It does seem a bit odd to mix up a leg up towards the deposit on a first home with retirement savings but that is how the scheme was designed. At least we have got rid of the mortgage diversion where you could divert some of your savings on a monthly basis to your home loan. That made even less sense.
I dont understand the bias among many commenters on here against young people ( or older people ) having a chance at home ownership. Surely the prospect of paying rent in retirement is an uncomfortable one. We should be trying to slow the rate of increase in house prices but I am against shutting first time buyers out of the market to achieve that.
Many people would have gone into kiwisaver with a three or five year planning horizon intending the use the scheme to help them with a deposit. That is better than waking up one day and deciding to buy a house. Presumably the scheme designers thought that most people would carry on in the scheme after making the withdrawal for their first home and thus finish up with a reasonable level of retirement savings and a home of their own. Much better than them having neither.
I'm not against owner-occupied home ownership - but if a government actually wanted to encourage that (and had the best interests of its young citizen/families at heart) - then it would make interest deductability for owner-occupiers a tax policy .. particularly whilst say children are preschool age. And a good government would pay a non-working parent in a household with a mortgage to stay at home, rather than subsidise ECE/day care. Under such favourable conditions for young families, home ownership is a good thing. In fact it is also a good thing for the upgrade and maintenance of our existing house stock .. something we are seriously falling down on with the shift of ownership towards rental investment and away from owner-occupiers.
So yes, lots of very good reasons why home ownership particularly for the young generation is good, but only when the socio-economic conditions are beneficial to them as borrowers. Presently, they don't stack up for families - rather the financial benefits of ownership are targeted at speculators/investors. Reverse these tax settings to favour the owner-occupier and penalise the speculator/invester and the rate of increase in house prices will slow.
You are kidding aren't you Kate? I have sometimes tried to make the odd joke on here only for people to enthusiatically support my wild imagining so I am assuming your support for making interest on debt tax deductible is in that category. If we really want to encourage Kiwis to rack up debt and make no effort to pay it off we should make the interest deductible.
If we really want to encourage Kiwis to rack up debt and make no effort to pay it off we should make the interest deductible.
That's precisely why there is so much speculation by rental investors at the moment - their interest is deductable, along with the rates paid, maintenace etc! And they can claim back the GST component as well. I'm saying turn the tables - and give the tax advantage/incentive to FHB owner-occupiers - NOT second, third, fourth and fifth home buyer rental investors.
Such a move would see the rental investors head for the exits en masse - further assiting the FHBs in terms of easing price pressures.
Just for the record, Residential rental income is not subject to GST so landlords are not able to claim input credits.
Any business can deduct expenses from income to arrive at profit. Residential property is no different except that for the last year or two landlords have not been able to claim depreciation as an expense.
Any business can deduct expenses from income to arrive at profit. Residential property is no different
Yeah, yeah, yeah - we've heard the arguement time and time again from the property speculator sector.
Well, I'm saying residential property investment SHOULD be treated (tax wise) different than all other businesses - because residential property investment does not create employment growth - in fact in the main, particularly with respect to the low end property investors, it fosters asset depreciation/decay.
Look at the small percentage of those who took up the govt subsidy on insulation from the property investment sector.
A slumlord is a slumlord is a slumlord - so it has been from the time of the industrial revolution.
Hmmmmm So are you saying that tenants are forced to live in uninsulated poorly maintained sub standard dwellings because of a shortage of rental accommodation? If so, surely we should be encouraging provision of more and better rental units. If there was plenty to choose from landlords would have to step up to the mark if they want to attract tenants. Perhaps it is the shortage of decent accommodation that makes first home owners cash in their kiwisavers so they can get somewhere healthy to live.
Dont most of your proposals force people into the arms of the slum lords? Would we not be better with landlords building new accommodation and thus creating jobs ?
No shortage of slums for rent - if anything the feedback I've had is there is a shortage of credit worthy, responsible tenants who are prepared to rent the slum stock. Many of these tenants rent from what I call the reluctant landlords - the folks who for whatever reason are renting out their ex-owner occupier home as these are of a higher standard of maintenance.
In my experience, since around 2003/04 FHBs find buying difficult as they are competing with property speculators who have tax advantages associated with ownership that the owner-occupier does not. Hence the speculator will pay a premium based on those tax advantages and more often than not end up taking a loss to the business when they can't achieve the right rental from day one. Hence, many go off and buy another rental trying to 'smooth out' the losses and/or improve the return on their existing portfolio.
When/if the government pulls the plug on the a/supp and/or the tax break we'll see a spate of mortgagee sales and the pendulum will shift back in favour of owner-occupiers.
Yes, as I do up the house Im relining rooms, then I max insulate, 2 more room planned this spring/summer...
There ae a lot of companies out there "keen" to sell insulation I must get 2 or 3 calls a month and get approached in Bunnings and even in malls (must be they find better mileage in the poorer areas). Especially the more expensive variaties which make the payback significantly worse (oh but you get a cheap loan!). The "cheap" interest rate off the council is also 7% so add that to the bill.
"Gouging" if its like the hat pump boys yep the "accredited" ones charge way more....or try to. My parents paid cash and used a non-accredited, saved $1k and got a 5 or 6 year warrantee....Of course they ring up annually now and try and charge $100+ to "check it out"....yeah right.
regards
Nothing to do with facts, kimy, rather rules. I'm advocating for a rules change. This Key government is getting there but in incremental steps. Another colour of government is sure to do it in a big bang and they won't be crying about the race to the exits by the property investing faction.
Yes and I recall you proudly mentioning at the time that a solo parent tenant of yours would simply have to approach the government for additional a/supplement to pay for the increase. And yes, I can imagine that as the slumlord you are, you minimise your maintenance bills accordingly. But rules or no rules regards the tax deductions on your ponzi plan - my experience has always been that those speculators operating at the bottom end always have to be dragged kicking and screaming to effect necessary repairs (and that goes for the government in the past as a slumlord as well).
You are part of the cause (of the problem) and the effect will be painful, I agree.
Pot calling the kettle, Kimy. Actually, lots of leveraged folk go belly-up, and I suspect what we will see when - and it's a when, not an if - TSHTF, that bank books will be bought at cents in the dollar by other banks, and you'll still owe more than your tenants can fund.
lots of leveraged folk go belly-up
In fact, as was demonstrated in the US crisis period (and which Janet the farm receivership advocate stated was happening here) - the banks often foreclose first on those borrowers with enough equity to repay the loan. They are slower to act on those underwater, so to speak. For the over-zealous property investors here I suspect it is most often the IRD, not the bank, that pulls the plug.
National has always had a hatred of savings programmes, & a love of spending on property. Witness Piggy demolishing the Labour Govt savings scheme, and Bolger pouring cold water on Peters' savings scheme in the '90s.
Plus both Key & English have both made statements in the past stating quite clearly that they will do anything to avoid undermining a frothy housing market. Plus ca change....
I am enjoying David's articles, not afraid to criticise the Key govt's failings. I've thought for a couple of years now that the nats are not serious about addressing housing, they are all talk and no action, as David argues a reinflating bubble is good for them. Then, if the bubble pops, they will have an automatic scapegoat in the council.
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