7% mortgage rates could collapse housing market

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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KiwiSaver hits $40b, but balances stay low

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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Make sure you are on the right tax (PIR) code for KiwiSaver before end of March 2017 – to possibly avoid paying too much tax!!!

It’s fast approaching that time of year again when you need to ensure that you are on the correct Prescribed Investor Rates (PIR’s) for the current tax year (ending 31 March 2017).

If you have invested in  KiwiSaver scheme, then you will have a prescribed investor rate (PIR).

What is a prescribed investor rate (PIR)?

A PIR is:

  • the tax rate that your KiwiSaver use to calculate the tax on the income it derives from investing your contributions.
  • based on your taxable income, eg income from salary, wages and any additional sources of income that you would include in your income tax return.

We recommend you review and confirm that you are on the correct PIR rates.

If you are on the wrong code, then:

  • If you are on a lower rate (e.g. 17.5% rather than 28%), then the IRD ask you to file a tax return for under deduction and penalties may apply.
  • If you are on a higher rate (e.g. 28% rather than 10.5%), as it is a final tax, there will not be any refund for over deduction

See below a chart that helps ascertain what rate you should be on.

Please feel free to contact us if you need further advice – info@insurenz.co.nz or call 09 551 3500.