NZ Govt pushes savings into housing

ScreenHunter_08 Jul. 01 09.14

By Leith van Onselen

Earlier this month, Interest.co.nz reported that young Kiwis are now raiding their retirement accounts – known as Kiwisaver – in order to get a foothold in the housing market:

Soaring numbers of young Kiwis are now raiding their retirement savings to climb into a rapidly inflating housing bubble.

close to 11,000 young New Zealanders had cashed in KiwiSaver retirement savings to buy houses in the past year…

[Kiwisaver] has provided NZ$217.6 million of people’s own savings and government grants towards the purchase of a first home.

…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…

Today, Interest.co.nz reports that New Zealand’s housing minister, Nick Smith, has indicated that changes will be made to make it easier for first home buyers (FHBs) to raid their Kiwisaver accounts to fund their home purchases. In the process, the Government hopes to circumvent new loan-to-value ratio (LVR) restrictions to be implemented by the Reserve Bank of New Zealand (RBNZ) that would raise FHB deposit requirements:

It’s official: The KiwiSaver scheme has now become the HouseSaver scheme.

The Government is making it quite clear it sees the scheme as nothing more or less than a short-term piggy bank that can be smashed open as soon as possible and the money inside pumped into the rapidly rising house market.

Housing Minister Nick Smith, in a Television New Zealand interview screened over the weekend, said the Government was looking at tweaking the KiwiSaver scheme to make it easier for people to access funds from it to buy first homes…

This move by the Government comes at a time when the Reserve Bank is considering imposing “speed limits” on banks’ high loan to value (LVR) lending…

Essentially the Government, having been frustrated in its efforts to get first-time buyers exempt from any limits on high LVR lending, is now seeking to go around the RBNZ measure – and actively undermine it…

“If young kiwis are using their KiwiSaver funds to buy a first home that is a good thing” [Smith].

“I think all New Zealanders acknowledge that if you get to your retirement years and you don’t own your own home, that you are having to pay rent, that you are not in nearly as good a position as if you had been able to get that deposit and own that first home.

As noted previously, New Zealanders already hold a disproportionate amount of their wealth in housing (see below IMF charts).

Housing Wealth
Household Financial Wealth

Therefore, diverting more financial resources into housing risks an even bigger fallout in the likely event that the housing market one day experiences a painful correction.

The above move from the National Government also shows why FHB affordability can only really be attacked from the supply-side or via curbing tax laws that favour property investment (e.g. winding back negative gearing). Simply curtailing credit, via LVR restrictions, impacts disproportionately those whom most need help, namely FHBs. So while the LVR limit might place downward pressure on housing prices, FHB access to the housing market (and home ownership rates amongst 25 to 34 year-olds) could actually worsen.

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Leith van Onselen

Comments

  1. Correct me if I’m wrong, but isn’t Australia already doing this; allowing SMSF to invest in property? Kiwisaver is a voluntary scheme, unlike your compulsory one, so the flexibility to either contribute or use the aforementioned voluntary contributions as part of a quasi SMSF should not be a surprise. If anything I’m surprised its taken so long to move the goalposts!

    • thomickersMEMBER

      you have a point

      but at least Australia’s preservation age legislation is strong & rigid (ie it stays, whether property or not, in the super system on behalf of the member).

      The kiwisaver is a weaker policy in addressing retirement/aging demographics (you may as well not have it as a policy).

    • Janet,

      In Australia if a SMSF borrows to invest in property then the property cannot be occupied by the members of the SMSF (breach of sole-purpose test). From what I can gather the Kiwi scheme allows them to occupy the property.

      Hopefully our government does not allow this in the future as we have about $1.5 trillion in super to fuel the fire.

    • LabrynthMEMBER

      You also need $150,000 minimum to buy in SMSF. You would need to be well into your 40’s to have that sort of money in your super.

  2. This is a very worrying development and shows that governments will go to almost any length to keep new money flowing into what is effectively a ponzi scheme. While RBNZ is to be commended for introducing macroprudential tools, this shows the lengths to which governments will resort when they are desperate.

  3. Let’s not forget that the RBNZ hasn’t actually done anything, yet! ( What a surprise!). But if it ever does, it can react to whatever the Government does by lowering the ‘speed limit’. Say reducing the 80% LVR to all loans and not exempting 12% if necessary. If that’s not enough, make the LVR 70% etc. The Government might yet shoot FHBers in the foot in its attempt to ‘help’ them….
    How a country can deplete its savings base, current and future, to the extent it has into the face of the natural shortcomings that it has, as demonstrated so graphically in Wellington over the weekend, beggars belief. The only answer I have is that New Zealand doesn’t actually have a problem at all! Australia does, via its banks……

  4. Mmmmmm…stupid as it is, it may well create an illusion of wealth for many. Oh well, easy come, easy go.

  5. Couple this with the ability for trans Tasman transfers of super and you basically have an early release strategy for either nation.

    My only concern (as an Aussie) is that recently cashed up Kiwis (ie the ‘scaff bros’) can pull their super out now, buy & sell a kiwi house then come back and use it to boost our prices.

  6. I wonder how many Australians in the “boom” state of WA have purchased investment properties in NZ and negatively geared them? The ATO link is here:

    http://www.ato.gov.au/Individuals/International-tax-for-individuals/In-detail/Investing-overseas/Tax-smart-investing–What-Australians-investing-in-overseas-property-need-to-know/?default=&page=4#Claiming_rental_deductions

    I doubt many Kiwi’s realise what is going on or allowed (do they have negative gearing in NZ?) and when WA unwinds, commodity prices fall and property prices start falling it could be a rush for the exits in NZ and Australia.

    6 all-important tax issues you need to know when investing overseas:
    http://www.yourinvestmentpropertymag.com.au/article/6-allimportant-tax-issues-you-need-to-know-when-investing-overseas-117591.aspx

    • Yes, NZ does allow negative gearing, and as I’m sure you know, has no Stamp Duty, No Land Tax, No Capital Gains Tax ( in reality!) and virtually no Foreign Investment restrictions. What could possibly go wrong……

    • boyracerMEMBER

      Some questions that article raises:

      Is the deposit repayable if the property never increases in price?

      How is the deposit repaid? Do the purchasers have to obtain finance and draw down on their equity? What if their income is insufficient to enable them to get an extra loan to pay back the $75k? Does their house get sold out from under them?

      • thomickersMEMBER

        how I see it:

        $75k (provided by council) $300k mortgage, which is 20% deposit/80% loan structure

        then sometime in the future:

        once the equity proportion hits $150,000 or 40% of property value, the $75,000 is returned through equity drawdown

        The risks are totally on the council’s balance sheet – how long will it take to get the deposit back?.