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OPINION
Q: I’ve been bothered for some time about property valuations. Caveat emptor seems to be forgotten.
If the median/average house price is about $800,000, typical rent is $600 a week and interest rates are 7 per cent, the sums don’t seem to work.
My sums for a landlord go:
Pity my poor children who, with a 20 per cent deposit of $160,000, need a loan of $640,000 for the same median house.
I simply don’t understand how the housing commentariat writes that house prices have bottomed and are due to start rising again.
Shouldn’t buyers be warned that house prices don’t have to go up, rather than newspapers reigniting another FOMO panic and saddling first-home buyers with a life-sentence mortgage? Dare I suggest house prices need to drop 50 per cent for the basic finance to work.
Side note: Long-term mortgage interest rates of 6 to 9 per cent are normal. My mortgage was as high as 20 per cent and low as 2.29 per cent – it’s been a wild ride. Around 7.5 per cent seems about right, but it means buying a house now doesn’t seem to make sense financially. Please explain.
A: I can’t explain it, and I’m not sure anyone can, really.
To strengthen your argument, the average price of a New Zealand house is more like $900,000. And according to Sorted’s mortgage calculator, $28,000 in income would cover just a $350,000 30-year loan.
For a while, in the last couple of years, it seemed as if sanity was returning to our house market as prices fell. But they are now rising again.
On your comment about the news media reporting this, it’s a case of “Don’t shoot the messenger”. Reporters tell what’s happening, not what should happen.
But you’re right, it pays for people to be aware that the recent price fall could well happen again. In our graph, every time the line goes below zero, prices are dropping. That has happened no fewer than six times since 1990. That’s almost twice a decade.
The fact is that house affordability has got silly in this country. House prices relative to incomes - a ratio that means more than just looking at house prices in dollars - are some of the highest in the world.
That wasn’t always the case. In the 1960s, 70s and most of the 80s, the average house price was just two to three times average household income. And that’s about the level that experts say a house “should” cost.
But since then the ratio has risen fast, reaching a peak of 8.8 in early 2022, says a CoreLogic report.
Since last year, the ratio has dipped. “Properties in New Zealand are now valued at 7.2 times the average household income, down from 7.8 six months ago,” said CoreLogic in August.
“Tauranga remains the least affordable main centre, with a value-to-income ratio of 9.5 in Q2 2023, followed by Auckland, Dunedin, Hamilton, Christchurch and Wellington.”
When we look at the history, it’s hard to argue we’re not still in a long-term house price bubble.
The possibility of a big price fall is, of course, of more concern to property investors than homeowners. True, those lucky enough to own their own homes usually love to see prices rise. But if a homeowner sells their house for less than they had hoped, usually they will be buying another home that will also be cheaper. So it doesn’t matter in most situations - unless the homeowner has borrowed heaps using their house as security.
What’s more, many homeowners are concerned about family, friends or other New Zealanders unable to get into the housing market.
Family members hoping to inherit lots when their parents or grandparents die would be disappointed if prices fell a lot. But the huge inheritances many receive - as well as the help with home purchases that homeowners often give their offspring - have contributed to the growing inequality in wealth in New Zealand. It wouldn’t hurt if that was curbed.
On your point about mortgage interest rates, our graph shows how the low rates of a couple of years ago were unusual. And back in the 1980s, rates were in the high teens. In the near term, mortgage rates aren’t forecast to grow much more, but who knows in the future?
So I agree that anyone counting on house prices heading upward from here would be wise to think about how they would cope with a bigger downturn than we’ve had lately.
The key is never to get yourself in a position in which you are forced to sell. That’s when people take big losses.
PS: Every now and then I hear of a house seller who has not sold to the person making the highest offer, but to a young family or an elderly person struggling to get an affordable home. It would be great to see more of that.
Q: I currently have a KiwiSaver account with the ASB. I’m over 65. It is set up with multiple funds as the bulk of the money will not be needed for many years. I recently withdrew a lump sum for a rather expensive holiday.
I expected the amount to come solely from the conservative fund, and when I completed the withdrawal form I used the account number as shown on the conservative fund screen - there was no section on the form to state which fund I wished to withdraw the funds from.
What actually happened was the money was withdrawn from all the funds, in the percentage that I had set up for investing in all the funds. So the growth and balanced fund was adversely affected at the worst possible time.
When I complained, the team leader agreed that the form was defective and was not designed for people with multiple funds. They said they would put forward my complaint and get their legal team to look at what was possible for the future.
I was very interested to read your column last week regarding multiple funds, the withdrawals from just one fund and the “champions” who allow it, including ASB. The ASB did not live up to this claim in my experience.
A: ASB confirms that you can withdraw from just one fund. “However, as this is not a common request, it is not a specific option on our retirement withdrawal forms,” says a spokeswoman.
“Customers have a single account number for their ASB KiwiSaver Scheme account (not one per fund), so unfortunately our operations team had no way of knowing that the customer only wished to withdraw funds invested in our conservative fund,” she says.
“The form highlights that any partial or regular withdrawal will be deducted proportionately from each fund in accordance with the customers’ contribution investment strategy, and this is what occurred in this situation.
“Where a customer has a specific request (for example withdrawing from one fund, or withdrawing in different proportions to their contribution investment strategy), they can give us a call to discuss their specific request. We currently ask them to manually note this on the form.”
She adds, “We appreciate this feedback. We will look to change our form to make requests like this easier for our customers.”
As more and more KiwiSaver members reach 65, I’m sure many will want to withdraw from just their lower-risk fund. That’s wise, as you avoid taking money from a fund that has just been through a downturn - which is what happened to you, unfortunately. I hope ASB, as a major KiwiSaver provider, makes this easier.
With your permission, I gave ASB your contact details. You have since been in touch to say you’re happy with how this has been resolved.
Q: Last week gifting was discussed in the context of the residential care subsidy.
Periodically I have wondered if donations to registered charities are considered as being gifts within this context, especially if donations have been made over an extended period.
A: You might not want to hear this, but yes, donations to registered charities “are considered gifts when assessing an application for the Residential Care Subsidy,” says Paula Rātahi O’Neill of MSD.
Q: On the gifting rules covered last week, the annual amount that can be gifted in the five-year period before an application is made for care increased from $7000 to $7500 on 1 July 2023.
A: You’re so right. When I wrote $7000 in last week’s Q&A, I was using outdated information. Apologies to everyone.
Q: Further to the recent letter re the cost of getting older and the residential care subsidy, I have not been able to get a definitive answer to my situation.
My husband is in residential care with Alzheimer’s, thus my monthly outgoings are currently $7000 a month for his care.
It is my husband’s second marriage and my first. Being somewhat younger, I worked and saved longer, plus being fortunate in getting a small inheritance. My own savings have always been in my name in a managed portfolio plus term deposits. The home is in joint ownership.
My question: when my husband’s personal savings are exhausted, does he then qualify for a residential care subsidy, or do they look at my savings? They are solely in my name and we do not have a prenuptial agreement.
Without sounding selfish, it could mean that when the time comes for me to go into care, I will not have the luxury of choice that I have been able to give him.
A: I’m afraid you’re also not going to like the reply from Rātahi O’Neill of MSD.
“When one partner applies for a Residential Care Subsidy, the assets of both partners are included in the asset assessment regardless of whether the assets are jointly-owned or owned separately,” she says.
“If you’re 65 or older, you and your partner’s total assets must be $273,628 or less. If you have a partner who’s not in long-term residential care, you can choose whether the total value of your combined assets is either:
Q: Last week’s Q&A about the costs of residential care for old people contained good information. There is mention of a house being an asset but no mention of an occupation rights agreement with a retirement village being an asset.
Some people can have millions of dollars tied up in such agreements. Could you please comment?
A: Says George van Ooyen of MSD: “The Residential Care Subsidy asset test includes someone’s realisable assets, and those of their partner if they have one. A realisable asset is defined as one that can be converted into cash.
“An occupation right agreement, or a licence to occupy a unit, meets the definition of a realisable asset because they can be sold and converted into cash.”
You can find more information on property ownership in this context here: tinyurl.com/NZPropOwnership, and on licences to occupy here: tinyurl.com/NZLicenceOccupy
Q: One of the letters published two weeks ago was somewhat disparaging about legal executives, referring to them as “highly paid secretaries”. Most lawyers could not function efficiently without the support of a good secretary. But legal executives are not just highly paid secretaries - they are highly experienced in their own areas of expertise. They usually have a Legal Executive Diploma, often have their own client base and fill an important role within a law firm.
As I read the letter I was hoping you would set the writer straight. Hopefully, you can put them straight this week.
A: Done!
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
Reserve Bank says leaving banks to their own devices hasn't worked.