NZ Herald 16 May 2015

AIt sounds as if you’re thinking of burying your money in the back garden of your new, cheap provincial property. Is that necessary?

I asked the Reserve Bank, which regulates the banking system. Just this past week it announced tougher mortgage rules for buyers of Auckland investment properties, which it expects will somewhat reduce Auckland house price inflation.

“The primary reason for our concern about the overpriced Auckland housing market is to reduce over-exposure to it by New Zealand’s banks,” says a spokeswoman.

What does the RB think about the possibility of a property plunge. “Whether property prices could drop by half from today’s values is purely speculative,” she says. “Nevertheless, a 50 per cent drop matches some of the more severely affected economies in the Global Financial Crisis such as Ireland.”

So they’re not ruling it out. But would such a drop cause banks to “collapse”? “The short answer is no, we do not believe so,” she says.

“The Reserve Bank conducts regular bank stress tests in collaboration with the Australian Prudential Regulation Authority. The most recent one was last year, and the results of it are featured in the November 2014 Financial Stability Report, pages 9 to 11, on our website.

“This stress-test exercise featured two imagined adverse economic scenarios over five years, one of which involved a sharp slowdown in economic growth in China, which triggered a severe double-dip recession in New Zealand. Among the impacts were house prices declining by 40 per cent nationally, with a more pronounced fall in Auckland — similar to your reader’s worst case scenario.”

So how would our banks fare?

“The Reserve Bank was generally satisfied with how the banks managed their way through the impacts of these scenarios, and we are comfortable that the New Zealand financial system is currently sound and stable, and capable of withstanding a major adverse event.”

Phew! Sounds good enough for me to keep my money in the bank. But in case you’re a worrier, the spokeswoman goes on to say this:

“In the extremely unlikely event of a bank failure, our Open Bank Resolution (OBR) policy would apply. The aim of OBR is to allow a distressed bank to be kept open for business while placing the cost of its failure primarily on the bank’s shareholders and creditors rather than the taxpayer.

“It would also allow customers to be able to have continued access to their accounts and other bank services, whilst an appropriate long-term solution to the bank’s failure is identified.”

We’ve gone into OBR in some depth before in this column.

Want to know more? “By the time you read this, our latest six-monthly Financial Stability Report will be published,” says the spokeswoman. “It offers the most up-to-date view of the soundness and efficiency of New Zealand’s financial system, backed up by hard data.” You can read about it, and OBR, at www.rbnz.govt.nz.

To add my tuppence worth, it’s important to realise that if house prices did drop a long way, most people would simply not sell their properties — whether homes or rental properties. Or they would sell and buy in the same market, and it wouldn’t matter.

Sure, some would find that their mortgage was higher than the value of their property — an uncomfortable place to be. But if they sat tight and kept paying off their mortgage the balance would fall, and hopefully after a while prices would rise.

A basic financial rule: never get yourself into a position in which you have to sell — whether it be a mortgagee sale or not.

I suggest Auckland property owners with big mortgages think through how they would cope if their income dropped — perhaps from a job loss or lack of tenants — or their expenses rose — perhaps from unexpected urgent maintenance. If you might be forced to sell your property, it would be better to trade down now. Forced sellers often have to accept horribly low prices.

AIndeed we do. And I’ve heard too many stories similar to yours.

I’m sure this is tricky stuff legally. In last week’s column, Inland Revenue said “The Care of Children Act 2004 specifies that a guardian must act jointly with any other guardians of the child,” in signing up someone under 16 to KiwiSaver.

But there must be a solution. Any bright legal brains out there with some ideas?

AAll is not lost.

“It was the employer’s responsibility to determine eligibility to enrol in KiwiSaver,” says an Inland Revenue spokeswoman. “Your daughter did not meet the automatic enrolment rules because she was under 18, but it appears she was happy for this to happen and to start making deductions from her pay.”

She continues, “What you need to do now is approach a KiwiSaver scheme provider directly. If your daughter is under 16 years old then all of her legal guardians will need to give their consent. If she is aged 16 or 17 then one of her legal guardians must co-sign the application form to enrol with her chosen provider.”

Obviously you’ll need to explain what’s happened to the provider.

“Deductions can still continue from her pay and will be directed to the chosen scheme provider. If you do not choose the same provider she is currently enrolled with, you will need to advise the chosen provider so they can arrange for any funds that have been paid to be transferred to them.”

Quick comment: a big Australian retail group should have been aware that auto enrolment into KiwiSaver applies only to people 18 and over.

AI’m not sure how you decided this stream was main. We sometimes meander up some intriguing tributaries. I’m also not sure how you found time to do your art, with all those other activities going on.

Anyway, well done! I’m sure you’ve got many readers thinking about their priorities and attitudes. Enjoy the single malt.