KiwiSaver

Homeowners not losing sleep over interest rate rises, survey shows

Shai Patel

A new survey has revealed Kiwi homeowners are largely unfazed about their ability to cope with mortgage rate rises, but they are continuing to find it difficult to curb spending on consumer items.

The nationwide survey by mortgage franchise network New Zealand Home Loans (NZHL) found more than half of respondents (57.6%) were either not concerned or were neutral about the potential for future interest rate increases.

The sentiment comes after the Reserve Bank held the official cash rate (OCR) last month at 1.75%.

Speaking to NZ Adviser, NZHL chief executive Julian Travaglia said although interest rates are slowly going up they are not completely unpredictable like in the past.

“I remember the days when rates were bouncing around like an elephant on a bungee cord,” he says, in contrast to their current slow but steady climb and the Reserve Bank indicating an OCR increase is unlikely any time soon.

“I don’t see the pressures that would require the Reserve Bank to force the OCR up particularly given that the housing market, at least temporarily, seems to be cooling.

“I think has made people a little bit complacent. I think people still don’t really understand that interest rates are by and large driven by off-shore funding costs by the banks as opposed to necessarily the OCR.”

He says mortgage holders should be paying off their debt faster and smarter.

“What we’ve seen from people’s spending habits is that they’ve managed to get themselves a home loan over a long period now when rates go up – when they come off that fixed rate and go on a new one, they can’t suddenly extend their home loan term out to make the payments lower again.

“So it’s going to force people into a position where they’re going to have to either make some reasonable cut backs or they’re going to get into some financial difficulty.”

Despite the view on interest rates, the survey found that homeowners have some areas of spending that don’t feel they have under control, with the biggest problem area of unplanned spending being around consumer items such as household electronics, tools and sports goods where 47% of respondents found difficulty controlling spending and secondly for services like household maintenance at 46%.

Travaglia he is concerned about those who have overextended themselves in the last few years and now tied to a hefty mortgage.

“If they haven’t been paying that off sooner – making hay while the low interest rate sun’s shining – they could find themselves in trouble down the track,” he told NZ Adviser.

The survey respondents consisted of 1,994 NZHL clients.

Source

RBNZ makes cash rate call

Shai Patel

The Reserve Bank of New Zealand has today left the official cash rate unchanged at 1.75%. The result was expected by all 11 economists surveyed by Bloomberg, the majority of whom also forecast the benchmark rate of 1.75% will hold for another year.

The Reserve Bank Governor Graeme Wheeler released the following statement:

Global economic growth has become more broad-based in recent quarters.  However, inflation and wage outcomes remain subdued across the advanced economies, and challenges remain with on-going surplus capacity.  Bond yields are low, credit spreads have narrowed and equity prices are at record levels. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has increased since the May Statement, partly in response to a weaker US dollar.  A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.

GDP in the March quarter was lower than expected, adding to the softening in growth observed at the end of 2016.  Growth is expected to improve going forward, supported by accommodative monetary policy, strong population growth, an elevated terms of trade, and the fiscal stimulus outlined in Budget 2017.

House price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions.  This moderation is expected to persist, although there remains a risk of resurgence in prices given continued strong population growth and resource constraints in the construction sector.

Annual CPI inflation eased in the June quarter, but remains within the target range.  Headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate.  The outlook for tradables inflation remains weak.  Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term.  Longer-term inflation expectations remain well anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.

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7% mortgage rates could collapse housing market

Shai Patel

In its May Financial Stability Report the Reserve Bank of New Zealand reveals the results stress tests designed to assess the vulnerability of households to service their mortgages if rates rise.

It’s findings show a high number of owner-occupier households would be under financial stress if rates jump, which could collapse the housing market as defaults rise as demand weakens further.

The central bank considered a 7% mortgage rate, close to the average for a 2-year loan over the past decade, and a 9% rate which it says is “extreme but still plausible.”

At a 7% rate, the bank estimates that 4% of all borrowers (6% of the total stock of mortgage debt) and 5% of recent borrowers (9% of total) would be unable to manage their essential expenses. A further 9% of all borrowers would have only a small buffer for discretionary spending.

At a 9% mortgage rate, 7% of all borrowers and 19% of recent borrowers would be unable to manage.

“While the LVR restrictions have increased the banks’ resilience to any fall in house prices, a significant share of housing loans are being made at high debt-to-income (DTI) ratios. Such borrowers tend to be more vulnerable to any increase in interest rates or declines in income,” said RBNZ Deputy Governor Grant Spencer.

The report warns that Auckland’s mortgage borrowers are at a higher vulnerability to increased rates with 5% in the city estimated to be unable to meet essential expenses at a mortgage rate of 7% compared to 3% elsewhere.

With high levels of New Zealand’s homeowners vulnerable to mortgage rate rises, the central bank forecasts that a sharp and unexpected hike in rates could see defaults increase, consumption cut, and homes being sold to pay debts.

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Why KiwiSaver balances go up… and down

Shai Patel

Quick question: what’s the difference between a savings account and a KiwiSaver account?

Short answer: when you put money in, the first always goes up, but the other goes up and down. That’s no small thing.

And while we personal finance folks like to go on about the magic of compounding for both saving and investment, sometimes we’d be better off pointing out how different the two are.

The one caveat to saying that a savings account always goes up is inflation. Savings can actually roll backwards as well, when you bring inflation into the picture. You’re adding money, but its real value and how much it can buy gradually becomes less and less. This is why we need investing.

Which brings us back to KiwiSaver, which is not a savings account as many people think of it, but rather an investment account. And investing is aimed at buying assets that become more valuable over time, despite inflation. It’s the remedy for inflation.

But what could make a KiwiSaver account balance lose ground?

Why your KiwiSaver account can go down

Okay, so I won’t bore everyone with too technical a discussion on unitisation, but the key thing to know is that when you put money into KiwiSaver, you’re buying units.

Units are a way of keeping track of what we own in KiwiSaver.

These units are linked to the assets our fund has invested in, such as shares, commercial property or bonds. Think of the investments like a big fat orange – and our units as a segment of that. When the orange rises or falls in value, so does the value of our segment.

Unlike a savings account, where we’re setting money aside, in KiwiSaver we are buying things that have value. That orange can be priced higher on the market at some times, lower in others. It’s a very normal state of affairs.

When we look at a savings account balance, we rightly think about how much we have. Not so with our KiwiSaver balance. When we look at that, what we’re really seeing is how much our fund’s investments and our corresponding units are worth – what their value is right now. Again, no small thing.

So perhaps instead of asking ourselves how much we have in KiwiSaver, we should be asking, “How much is my KiwiSaver worth at the moment?” Might be higher, might be lower.

Of course, the idea is for our units to increase in value over time. Either because someone else will pay more for them on the market or because they earn income like rent or dividends, the overall trend should be up. That’s why we do this! Without the aim of a return, there would be no point.

But there is such a thing as a negative return.

Why your KiwiSaver account will go down

Since the GFC in 2008, we’ve had good times of growth in KiwiSaver. Long may that continue!

But this also means that most of us have only seen things move in one direction, with KiwiSaver balances almost never heading down. Things did dip a bit last August, but because most of us contribute small amounts regularly to our KiwiSaver, we probably only saw things flatten out a bit. Our balances would not have gone down at all.

At some stage they will. If you remember the GFC or are a veteran of the dot com bubble, you’ll remember how quickly markets can turn, and how assets can suddenly be worth less. When something like that happens again, we will see our KiwiSaver balances tumble.

Again, this is because our balances do not measure the money we have, but what our units are worth.

And because people feel losses so much more acutely than gains, typically there will be thousands of people calling up their KiwiSaver providers trying to understand how on earth they have lost money when they have been putting in cash all this time! We’ll need to be ready.

Much of this is about the right mindset to have when there is a downturn. Ideally, we’ll say something like:

• “Yep, saw that one coming.”
• “Bound to occur from time to time.”
• “Must be that point in the cycle.”
• “I wonder what it’ll be worth in 10 years?”

The worst action would to be to act rashly and run for cover. “Sell! Sell!” is the classic scene of a moneybags barking into a phone to his broker. If we suddenly sell our units and buy others that seem far safer in another fund, we effectively lock in our losses and miss out when values rebound. We lose money permanently.

It’s all about perspective. Because we are typically drip-feeding into our funds, when unit prices plunge, they actually become a bargain. Someone might say, for instance, “I’m putting even more money in now because I know I’ll reap rewards in the future.” When oranges are on sale, it can be a good time to buy.

Now if any of this talk about balances moving up and down makes you anxious, you should contact us to make sure you’re in the fund that suits you best. After all, you should be relaxed about your KiwiSaver and not losing sleep.

So what’s the difference between a savings account and a KiwiSaver account? One only goes up. The other goes up and down, but should always be worth much more in the long run.

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KiwiSaver hits $40b, but balances stay low

Shai Patel

Strong investment growth has boosted the value of KiwiSaver to over $40 billion but individual balances remain low for many despite the scheme running for nearly 10 years.

Figures from Australian research firm Strategic Insight show total KiwiSaver funds hit $40.651 billion at the end of March, up from $38.416b as of December 31.

Daniel Morris, senior manager data and systems support at Strategic Insight, said KiwiSaver had seen 5.8 per cent growth over the quarter, bouncing back after a period of lower growth in the December quarter.

“It was probably a bit larger than expected,” he said

But while the total amount looks impressive, individual saving are still relatively small.

Based on Inland Revenue figures 2,727,675 people were signed up to KiwiSaver in March, putting the average balance at $14,903.

David Boyle, group manager education at the Commission for Financial Capability, said that on the surface KiwiSaver looked as if it were going well.

“But scratch the surface and there are some significant concerns and issues that need to be addressed to really get KiwiSaver delivering to its true potential.”

Boyle said the average balance was affected by the number of under 18-year-olds in the scheme who did not have much in their accounts.

“Most were signed up when the $1k kickstart was available and talking to a number of providers very few of these members are making any regular contributions until they reach the age of 18. So this affects the average balance.”

About 360,000 members are under 18.

Boyle said about 580,000 people, another group, were not getting the full government subsidy which meant they were contributing nothing or less than $1043 a year.

He said KiwiSaver providers needed to do more.

“Providers need to keep working on getting their members connected to their KiwiSaver account, especially those that have not made contributions but are eligible for the member tax credit.”

Claire Matthews, a KiwiSaver expert at Massey University, said it was hard to judge whether the $40b figure was a reason for celebration because people might have saved that money regardless of KiwiSaver.

“We don’t know what people would have saved without that.”

Matthews said an average balance of less than $15k did not sound a lot but it depended on the age of the person.

“For someone aged 60 – if that is all they have saved it’s not great,” she said.

But for someone in their 20s it was a good start which would now benefit from compound interest.

Matthews said the Government needed to increase the minimum contribution rate to help boost balances.

She believed individuals should contribute 10 per cent of what they earned. The current minimum is 3 per cent.

Richard Klipin, chief executive of the Financial Services Council, said the average balance of between $14,000 and $15,000 was a start.

“Like most developing countries we have got to start somewhere.”

But he said it was not enough and it opened up the need for greater advice around how much was enough to live off in retirement.

Susan St John, co-director of Auckland University’s Retirement Policy and Research Centre, said although average balances were growing, those at the low end would likely not have much at retirement.

“Not only have withdrawals for housing accelerated, but many struggling families are having to access funds under hardship claims.

“Many of those under the median will have very small amounts, if any on retirement.”

On top of that issue she said male median balances would outpace female balances.

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Are You Maximising Your KiwiSaver? – Make sure you do by 30th June 2017!

Shai Patel

I wanted to make you aware of Member Tax Credits for KiwiSaver that you are able to claim.

There were just under 580,000 eligible KiwiSaver members who received no contribution from the Government in their accounts in the 2016 financial year. That’s up from 573,000 the year before, 517,000 a year earlier and 466,000 in the 2012/2013 year. – Why let the Government keep money that is entitled to you!!

The Government contribution to your KiwiSaver savings is worth up to a maximum of $521.43 – but to get the full amount, you need to have contributed at least $1042.86 by 30 June 2017.

The Government pays 50 cents for every $1 you contribute, the maximum will be $521.43, so therefore you need to contribute $1042.86 to maximise the tax credit

If  you are 18 or over, working, self-employed or not working, you can get these tax credits as long as you contribute $1,042.86 for the year. 

You can check your KiwiSaver contributions online with most providers and see if you have contributed at least $1,042.86.

You DO NOT have to contribute if you do not wish to or you can contribute what is affordable in order to get at least some of the $521. (So for example if you contributed $500 you would receive $250 tax credit).

We can show you ways to make this easier over the course of the year and plan it so that you are maximising the benefits of KiwiSaver.

If you have any questions, then please feel free to contact me on 09 551 3500 or email info@insurenz.co.nz.

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Reserve Bank delivers cash rate call

Shai Patel

The Reserve Bank of New Zealand (RBNZ) has this morning left the official cash rate unchanged at 1.75%. 

Governor Graeme Wheeler said in a statement, “House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Canstar general manager Jose George said it is an uncertain environment for home owners and warned on the increasing pressure for mortgage holders.

“As recent statistics show, while house prices have started cooling in  Auckland and other larger cities, mortgage rates are starting to trend upwards,” said George.

“Independent of OCR, the costs of servicing a mortgage are rising. Couple this with rising inflation and the flow-on effect this could have on other living costs, you have a situation where an already stretched household budget will not be able to take the added pressure for most NZers.

“For savers the situation is more positive.  Despite a series of drops in OCR, term deposit rates have remained largely untouched over the last 12 months or so. We are now starting to see increases in deposit rates, reinforcing the belief that banks are keen to grow their existing domestic deposit book.

The full statement by Reserve Bank Governor Graeme Wheeler is below:
Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

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Why Review your KiwiSaver?

Shai Patel

It is becoming more and more important for you to review your KiwiSaver and see how it is tracking to enable you to have the best retirement.

People are seeing their balances grow each year they are in KiwiSaver. Many people have a substantial amount to now consider KiwiSaver as an investment that will make a difference at retirement.

Please click here for reasons to be looking at your KiwiSaver.

KiwiSaver could be eroded by NZ Super change

Shai Patel

Some people may be forced to live off their KiwiSaver for two years while they wait to get New Zealand Superannuation, an academic has warned.

The Government announced plans this week to lift the pension age to 67 by 2040. But it will leave the access age for KiwiSaver at 65.

Susan St John, director at Auckland University’s Retirement Policy and Research Centre, said people turning 65 may have no choice but to dig into their KiwiSaver if they can’t work and the benefit is asset-tested.

“If there is nothing but a welfare benefit that is means tested and KiwiSaver funds are part of that means test then people who can’t sustain adequate levels of paid work will have no alternative but to erode their savings pots.”

“So not only do the people struggling already to work at 65 not get the pension they need at 65 but when they do reach the magic age of 67 they may have little else to call on for additional income.”

St John said its research showed retirees needed around $10,000 a year on top of NZ Super to have a modest retirement.

“This requires a sizeable lump sum especially when the Government doesn’t help retirees with mechanisms to annuitise fairly.”

St John said well-off people would be fine with the NZ Super age at 67 but it could be crippling for others.

“These ‘others’ may not enjoy the same average longevity prospects directly as a result of this policy.”

But David Boyle, group manager investor education, at the Commission for Financial Capability which last year recommended the Government keep KiwiSaver access at 65 while increasing the NZ Super age to 67, admitted it could see people using up more of their KiwiSaver at the beginning of their retirement.

But he said the 20 year transition period meant people had time to plan for the extra amount and save for what they might need.

“They can think about ‘how much do I need to save to make up that gap’.”

He said that amount could be equivalent to two years of NZ Super – around $18k per year for individuals and $23k per couple.

Boyle said it had wanted the KiwiSaver age de-coupled from the pension age so people could have certainty over when they would get access to their own savings.

And he said if the two were separated there should be a public debate over whether access to KiwiSaver stayed at 65.

“I think there still needs to be a discussion around what is the right age.”

The commission has not proposed a specific age for KiwiSaver access and Boyle said there may not be a one-sized fits all approach.

The proposed pension age change would not come up for a law change until after the election.

More than 2.7 million people are signed up to KiwiSaver with over $34 billion invested.

A spokeswoman for Finance Minister Steven Joyce said that the Government recognised that people expected their KiwiSaver to be available from age 65.

“And we respect that – it will give them more flexibility to draw down their KiwiSaver funds when they choose,” she said.

“The Retirement Commissioner recommended decoupling in her Review of Retirement Income policies last December.

“People will ultimately make their own decisions about the use of their KiwiSaver funds but in regards to people unable to work past 65, there are existing mechanisms for the Government to provide financial support through Work and Income.

“On top of that the Government will legislate for a review in 2030 to consider whether any temporary support is needed for people not able to work beyond the age of 65.”

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NZ superannuation changes: what they mean for you

Shai Patel

Prime Minister Bill English announced that the age of eligibility will rise from 65 to 67, in gradual steps, from 2037.

The changes will be phased in from July 2037 and will not affect anyone born before July 1972.

The age of eligibility will increase six months each year from July 1, 2037, until it reaches 67 on July 1, 2040.

What does that mean for you?

Will the Super changes affect me?
If you are born on or after July 1, 1972, yes. You will have to wait until you are 67 to get your pension. But you will still be able to access your Kiwisaver at 65.

What if I’m born on June 30, 1972, or earlier?
Nothing will change. You will still get NZ Super when you turn 65.

What if I’m an immigrant?
If you’re a resident or citizen in New Zealand now, nothing will change. You will still get Super if you live in NZ for 10 years (five of those years after 50).
If you arrive after the law is changed (possibly next year), you will have to live in NZ for 20 years to get Super, five of them over the age of 50.

Will I still get my SuperGold card at 65?
Not once the retirement age is lifted. The age for a SuperGold will go up to 67 too.

Will the payments change?
No. they will remain at 66 per cent of the average wage (currently $335.50/week per person for a married couple or $443.50/week for a single person living alone)

What if I’m rich? Will Super be means-tested?
No. There are no plans for asset testing or income testing.

What are the expected cost of Super in the future?

With 1.1 million people expected to be retired in 2030 the forecast cost would rise to $20 billion a year equivalent to 6.2 per cent of the country’s output (GDP) against $11b a year and 4.8 per cent now.

The changes would lower the cost by 0.6 per cent of GDP – from 7.2 to 6.6 per cent of GDP – in 2045.

How does it compare with other countries?

Australia is at 65 now, rising to 67 by 2023.

Britain is 65 now rising to 67 in 2028 and to 68 at a later date.

The United States is 66 now rising to 67 in 2027.

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