Mary Holm: Pricey homes point to meltdown

House prices need to fall rapidly or freeze for a while to give incomes a chance to catch up. Photo / Janna Dixon

I'm 25, married, earning just over $62,000 a year, living in Auckland. In order for my wife and I to buy a property to live in, I would need a deposit of between $50,000 to $100,000. That alone is no small feat.

I would then need between $684 and $769 per week to pay for the mortgage. Considering my weekly wage is $806 after tax, student loan and KiwiSaver, and we would like to have kids in the next couple of years with a parent at home, this becomes literally impossible.

One thing I've never understood is how the average house price in Auckland can be around $500,000 and the average salary is only around $50,000. If interest rates are only at 7 per cent and somehow a deposit of 20 per cent was paid, Joe Average still ends up having to pay $400,000 x 7 per cent = $28,000 a year in interest before paying any capital back.

Compare this to the US where the average salary may be about $50,000 but the houses are only about $250,000 on average. My numbers will be a bit off but I trust you get my point. Why is there such a disparity? Are we just heading for a massive meltdown like in the US?

Who knows? But I agree with you that house prices are out of whack, and logic says they've either got to fall fast or perhaps just go nowhere for quite a long period, while wages catch up.

While any fall in house prices this year is likely to be blamed on whatever's in next week's Budget, I reckon that the unaffordability situation as you've described it is likely to be just as important a factor.

And it's not just wages that seriously lag behind house price growth. Here's an excerpt from another reader's letter: "I have been a residential property investor for about 17 years. In my first property, the rent paid for the mortgage. Since then house prices have increased 400 per cent but the rent only 90 per cent."

That huge difference in growth rates can't last either. Normally, low rent relative to house prices will depress demand for houses because:

* More people will see renting as better value than home ownership.

* Fewer people will want to own rental properties, because the income they generate is low.

In recent years, though, rapidly rising house prices have buoyed demand - which in turn has further pushed up prices. First home owners have sacrificed lots to get a place of their own, fearful it will cost much more next year. And landlords have invested with both eyes on capital gain.

But once these two groups realise the fast growth is over, I suspect economics will kick in.

As yet another reader has put it, "If some property investors can come to accept that the average house price should not, in the long run, rise faster than average rents, and if they come to fully appreciate all the hassles, expenses and risks involved, they may finally give residential property a miss ... allowing prices to fall back to a sensible equilibrium - defined as an economically viable relationship between rents and prices."

Hang in there. There might be a longish wait. House prices could even rise fast again before sanity prevails.

In the meantime, it's great that you are in KiwiSaver. When you finally do get in a position to buy a home, you can get considerable help from the scheme - the right to withdraw much of your money, and perhaps to get a subsidy.

I retired on March 31, 2010.

My income for each of the last two years was around $80,000, and my PIE income less than $22,000.

Therefore it seems to me that I would have to elect 30 per cent for my PIR for the 2010-11 year, using the rules as you set them out in your last column, even though I know now that my future income will be less than $48,000, so my PIE income should be taxed at 21 per cent.

Do you agree, or is there another option?

I do agree. I'm afraid there's no option.

Here's the word from Inland Revenue: "To make PIE tax a final tax it is based on either or both of the last two years' income." You can use whichever of those two incomes is lower.

"This means that it takes two years before an increase in your income will increase your rate, and only one year for a decrease in income to lower your rate. Your current year income is not taken into account."

Over most people's lives, this will work to their advantage, as incomes rise much more often than they fall throughout a typical career.

Unfortunately for you, though, your income has dropped considerably soon after PIEs came into existence. So it's hard luck for you. But at least it's only for one year. Next year you can lower your PIR rate to 21 per cent.

Is the date at which KiwiSaver matures (by those who join prior to age 60), tied to the NZ Super age?

While it seems clear that the NZ Super age will rise from 65 (current government policy notwithstanding), presumably at least existing members of KiwiSaver will have access to their savings at 65.

While raising the NZ Super age will be difficult enough, one can only imagine the furore if the KiwiSaver age is raised as well, and a group of existing KiwiSavers who turn 65 in, say, 2020, have to wait an extra year or two for their KiwiSaver funds and get hit by the crash of 2021 (or whenever). By that stage most should be in conservative funds, but some won't be.

The time at which people can get their money out of KiwiSaver has always been NZ Super age.

That means that nobody is guaranteed to get access to their money at 65. However, when - and I do think it is "when" not "if" - a government raises the NZ Super age, it would be politically disastrous if they didn't give lots of warning.

My guess is that everyone over 55 can expect their NZ Super to start, and KiwiSaver to stop, at 65. But for a 20-year-old it could well be 68 or even 70.

Is that a bad thing? I don't agree with your point about a crash. In every market slump there will be some people just about to start withdrawing their money - even if the NZ Super age remains as it is.

As you say, anyone close to spending their money should have it in conservative investments. If they don't, more fool them. They've had plenty of warning - from me and others.

Beyond that, it makes sense to raise the NZ Super age, given how much superannuation costs and the fact that people are living much longer lives than when 65 was decided upon.

You might say that's tough on the young. But they will get decades of KiwiSaver contributions from the Government, plus compulsory employer contributions. And if the NZ Super age is raised, they will get even more years of those contributions - which stop at KiwiSaver withdrawal age.

True, government payments to KiwiSavers are much lower than to superannuitants. But over all, the young will do pretty well out of KiwiSaver.

I have recently come across some disturbing facts relating to KiwiSaver.

It seems that existing members of KiwiSaver who take a new temporary job are prevented from making a request for deductions and are therefore unable to receive compulsory employer contributions.

Ironically temporary workers who have not yet joined KiwiSaver are entitled to join and receive employer contributions.

The Revenue Minister has informed me that KiwiSaver should allow all workers in New Zealand to participate in workplace schemes and receive employer contributions. However, these rules seem to discriminate against those who have already joined KiwiSaver and are working temporarily.

Temporary workers pay tax, contribute to society and fill vital roles in the workplace, so why should they be denied the right to receive employer contributions?

Some temporary employees may be able to negotiate an agreement with their employer to receive voluntary contributions. However, I am aware of a government department that will not pay voluntary contributions to temporary workers who are already KiwiSaver members, stating that the legislation and IRD advice now prevents it from doing so. This means voluntary employer contributions are not an option for most temporary employees who have already joined KiwiSaver.

Has KiwiSaver become a scheme for the rich, just for those in permanent work?

Surely all workers should be able to enjoy full participation in KiwiSaver. Why are temporary workers excluded from receiving employer contributions? Why is their right to save for retirement now restricted?

Given that beneficiaries and others not in the workforce can join KiwiSaver, I don't think it's quite right to say KiwiSaver is a scheme for the rich.

However, it does seem that most of what you say is correct. It's not compulsory for employers to make KiwiSaver contributions to temporary workers - including casual workers and those on contracts lasting 28 days or fewer - who are already in the scheme when they start the job.

Nor can they ask their employer to deduct 2, 4 or 8 per cent of their pay to go into KiwiSaver.

They can, though, make contributions directly to their provider. And, contrary to what you were told, there's nothing to stop an employer from also contributing voluntarily if they wish. You might want to show this Q&A to the government department and suggest it check with Inland Revenue, which verified this.

It's different for temporary workers who are not members of KiwiSaver. Unlike those in permanent work, they won't be automatically enrolled when they start a job. But if they opt in to KiwiSaver after starting the temporary job - either by approaching their employer or a provider - they will be in the same position as other employees.

This means contributions will be deducted from their pay, and their employer will have to make compulsory contributions.

I agree with you that this doesn't seem fair. And it might be difficult for a temporary worker to negotiate with an employer to get them to make voluntary KiwiSaver contributions.

But take heart. Inland Revenue says this issue has been identified, "and officials are currently considering the matter".

KiwiSaver basics
The KiwiSaver Basics page on www.maryholm.com includes the answers to many readers' questions about the scheme.

Mary Holm is a part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her 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 or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.