NZ Herald 22 February 2014

AThis is another of those situations in which there’s no clear right answer.

Arguments in favour of continuing to rent include:

• Data in the OECD report I quoted a couple of weeks ago. It looked at the ratio of New Zealand house prices to rents, and said this country is 66 per cent above it’s long-term average — compared with 5 per cent for the OECD overall. In other words, renting is a better deal than buying at the moment.
• The need to keep some emergency funds.
• The concern that you might turn out to have bought at a market peak.

However, one sentence in your letter caught my eye: “Our current rental agreement is likely to come to an end.”

Perhaps the worst thing about renting — especially if you have a family — is that the landlord can decide when you’re going to move. That can be pretty disruptive for a family, especially if it happens repeatedly.

There’s more to it, too. If you own your own place, you can decorate as you wish, or renovate, or develop a garden that you’ll be around to enjoy. A family can literally and figuratively put down roots in their own place.

You’re right, too, that paying rent is “dead” money — you don’t get any future gain from it.

A counter argument is that mortgage interest is also “dead”. Sure, principal repayments build up your equity, but in the first years of a mortgage most of your payments go on interest. But that’s not really valid for a couple of reasons. Firstly, after ten years or so, you’ll really make inroads into the mortgage principal. Also, you do get something for the interest you pay — the chance to participate in any house price appreciation.

As you say, that appreciation might not happen, at least for a while. But here’s a funny thing. Older people can often remember what they paid for their first home, but you don’t hear them talk about whether they bought at a good or bad time. Over the years it all becomes rather irrelevant.

The emergency fund issue is important. It’s not clever to find yourself running up a credit card debt you can’t pay off fast. So perhaps set aside several thousand dollars that doesn’t go into the house deposit. Or make at least part of your mortgage a revolving credit loan, so you can access lower-interest money if needed.

How does all this sit with you? If you’re thinking, “Yes we could buy, but…” then you’re probably not in the emotional space for buying a home. A lot of this is about non-financial issues such as the desire for security and a family base. If that’s not how you feel, then it might be best to rent for a while longer.

But if home ownership appeals, why not start looking? Even if you can afford only a modest place, you’ll probably enjoy the fact that you own it.

It’s great to be in a position in which you don’t have to buy. And given what we’re hearing about the market shifting a little — with fewer people at auctions and open homes — you might find you can bargain quite hard.

P.S. You mention the new LVR rules, which mean that for the vast bulk of bank mortgage lending the borrower needs at least a 20 per cent deposit. As I said in a recent column, it’s still possible to get a mortgage with a smaller deposit. But it’s much lower risk to have a decent deposit, so you’re probably best to have 20 per cent anyway.

AHere’s how the process is explained on www.kiwisaver.govt.nz:

“During Month 1: Every payday your employer deducts KiwiSaver contributions from your salary or wages. In most cases, your employer needs to send this money to Inland Revenue by the 20th of the following month.

“During Month 2: Your employer sends your KiwiSaver contributions to Inland Revenue, along with a report that summarises their payroll for the month. We start checking that the information your employer has sent through is correct. It can take us up to a month because of all the checks we need to make. Note: If information is missing, or the data doesn’t match our records, we follow up with your employer. This adds more time to the process.

“During Month 3: We transfer your contributions to your scheme provider, including any interest earned, once we’ve made sure that your employer’s payroll schedule is correct.”

As mentioned, you do get a little interest — at an annual rate of 1.57 per cent — while your money is going through the process. But it’s a far sight from the 5.36 per cent paid in the early days of KiwiSaver. While interest rates in general were higher then, that’s still a big drop.

I agree with you. The whole process sounds cumbersome — surprisingly so given that KiwiSaver will be seven years old in July.

But perhaps we shouldn’t complain too loudly. The government is still pretty generous to people in KiwiSaver, with the kick-starts and tax credits. And as your KiwiSaver account balance grows, the proportion of your total savings waiting for clearance at Inland Revenue will become miniscule.

By the way, none of this concerns non-employees, who make their contributions directly to their provider. The provider should be able to process that money promptly.

AFirst the bad news. If you’re an employee, the only way to join KiwiSaver is via your employer.

Next the good news. That’s not the commitment you might think it is. You have to contribute 3 per cent of your pay for only a year — and even less if you face financial difficulties.

After 12 months you can take a contributions holiday. It’s an easy process, and you can renew every five years all the way through to retirement if you wish. While you’re on holiday, you can contribute nothing or any amount you like, directly to the provider.

By the “minimum” contribution, I assume you mean the $1043 you have to contribute each year to receive the maximum tax credit of $521. If you put in less, the tax credit is 50c for each dollar contributed. But I agree, you might as well get the maximum free money from the government.

Keep in mind, though, that there’s also free money to be had from your employer. If you don’t take a contributions holiday, but keep putting in 3 per cent of your pay, you’ll get the employer contribution as well. That matches your 3 per cent, except the employer’s contribution is taxed.

I can fully appreciate that it might be hard for you to join now, given your other heavy pay deductions. But maybe a further 3 per cent wouldn’t make much difference. Or, if that’s just not possible, I suggest you sign up as soon as your other obligations are over.

Wavering? Don’t overlook the third lot of free money, the $1000 kick-start three months after you join.

AYoung people can’t opt out of KiwiSaver, even if their parents signed them up for it. Or at least that seems to be the case so far. Somebody might challenge it in court — and it would be an interesting case.

I suspect, though, that most people wouldn’t be bothered, given that they can easily take contributions holidays if they don’t want to take part in KiwiSaver — see answer above.

If your child challenges you later about committing them to KiwiSaver, tell them:

• You wanted them to have the $1000 kick-start, while it’s still there.
• Being in KiwiSaver can help them build a savings habit and learn about investing.
• KiwiSaver is the best place to save for a first home. They can use employer contributions as well as their own savings to buy the home, and they may also be eligible for the first home subsidy.

In light of all that, would they not sign up their own child?