KPMG's head of banking and finance John Kensington wonders whether the growing trend of young Kiwis using Kiwisaver for a home deposit is just 'pushing the problem of retirement affordability down the track' for future generations

KPMG's head of banking and finance John Kensington wonders whether the growing trend of young Kiwis using Kiwisaver for a home deposit is just 'pushing the problem of retirement affordability down the track' for future generations

KPMG's head of banking and finance John Kensington is questioning whether the growing trend of young Kiwis raiding their Kiwisaver accounts to buy houses might have negative future consequences.

In KPMG's Financial Institution Performance Survey (FIPS) March 2019 quarterly analysis released on Wednesday, Kensington highlights the amounts being taken from Kiwisaver accounts to use as deposits for houses.

He says while Kiwisaver withdrawals for first home purchases dropped slightly in the March 2019 quarter compared to those in the December 2018 quarterly, down from $252 million to $235 million - this could be put down to seasonal trends, with the March quarter taking in much of the summer holiday period.

"Looking to adjust for this seasonality, Kiwisaver withdrawals for first home purchases as a percentage of new mortgage lending to first home buyers increased from 8.78% to 9.37% between the prior and current quarter, indicating that it was likely that more of first home buyer’s deposits were coming from their Kiwisaver funds," he said.

Assuming a 20% deposit for first home buyers and the fact there was a recorded $2.509 billion of new lending to first home buyers in the quarter, this assumption results in deposits of $627 million being required.

"Based on these figures, this trend indicates that about 37% of first home buyer’s deposits are coming from KiwiSaver," Kensington said.

"This amount is up from an approximated 34% in the December 2018 quarter."

Extrapolating the data further, Kensington said given that many first home buyers would have deposits lower than 20% of their house price, "it is probably closer to 50%, or half, of a first home buyer’s deposit coming from their KiwiSaver funds on average".

Official RBNZ figures indicate there's been no letting up in the buying activity for FHBS. In the first two months of the June quarter the FHB grouping borrowed over $2 billion. And in the latest month of available data - May - the FHBs actually surpassed the borrowing level of investors (with well over $1 billion) for the first time since the RBNZ began releasing this information in August 2014.

"Given KiwiSaver is designed to be there for retirement, it does beg the question of whether this trend of many young Kiwis using KiwiSaver now for a home deposit is just pushing the problem of retirement affordability down the track for future generations," Kensington said.

Banking sector roundup

Elsewhere in the latest FIPs the New Zealand banking sector  experienced an 8.98% increase in net profit after tax (NPAT), when compared to the quarter ending December 2018. Profits rose to $1,454 million.   

Kensington said the increase was primarily driven by large growth in non-interest income (up $190 million). This followed a 10.36% decrease in non-interest income in the prior quarter that drove an overall decrease in NPAT, demonstrating the volatile nature of this figure and the consequent impact on results.  

“The movement in non-interest income might be the biggest driver of the result, but the slow-down in the mortgage lending stats likely holds a better barometer to how things are running at present,” he said.

After a relatively strong December 2018 quarter of new mortgage lending, up 9.04% to $17.1 billion, March 2019 saw a dip in new mortgage lending, down 14.61% to $14.6 billion.

Other drivers

Kensington said other drivers for the banking industry in the March quarter included a decrease in net interest income of $69 million, and a small increase in impaired asset expenses of $27 million. The banking sector continued to have steady loan growth over the quarter, up 1.48%, growing from 1.16% in the period, and up 5.25% for the year. Asset quality also remained fairly steady.  

He said in terms of growth in loans, Kiwibank continued its strong growth with 2.85% growth in the quarter, finally overtaking TSB in terms of highest percentage increase, with an annual percentage loan increase of 9.50%, compared with TSB in second place with 9.11%.

All banks saw reasonably steady growth over the quarter, with the major four banks seeing between 1.33%–1.68% growth for the quarter.

Asset quality deteriorated slightly in the quarter; however, given the extremely low impairment expense levels, small dollar movements result in large percentage movements.

Impaired asset expense increased by $27 million in the current quarter, from $80 million to $107 million, representing a 33.42% increase.

However, impaired asset expense (as a proportion of average gross loans) continues to remain at extremely low levels, at 0.10% of gross loans (up from 0.08% in the prior quarter). Provision levels continue to remain fairly low and stable with small increases in both individual and collective provision. The increase in the collective provision of 1.63% was largely in line with the increase in gross loans of 1.48% over the quarter.

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13
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It is a not well known fact that the first ten years of retirement savings are by far the most important because of the power of compound interest. Allowing the withdrawal of kiwisaver funds to buy houses will eventually prove to be one of the biggest mistakes of the Key era.

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But it did succeed in pumping up house prices to support Key's political base, and house prices increase seems to be the measure by which economic success is measured by that political base

While there is some truth in Kensington’s comments and that above, the reality is that in practice being able to withdraw one’s own contribution (and not all) is positive for long term retirement savings.
The reality is that those saving towards a house knowing that funds locked into KiwiSaver would mean that manny - if not the majority of savers - would put off KiwiSaver until after purchasing a home and then there is a high probability that taking up KiwiSaver would be delayed. The reality is that one being able to access one’s contribution and getting the government and employer contribution while saving for a house is a great incentive to take up KiwiSaver.
I am a past public servant and I know exactly what happened to my peers regarding the Government Superannuation Scheme for public servants. The majority pulled out of the scheme to buy their first house and despite having the ability to rejoin (once only) the vast majority did not. My wife was one and she now severely regrets it.
I have no doubt that based on the experience of the GSF, it was Cullen et al intention to make KiwiSaver attractive in the first place to savers was that they could withdraw for a first home. The alternative was simple - they would not have joined in the first place.
While compound interest and saving is very attractive, the reality is that there are stages in life - early in adulthood responsible savers are looking to a first home, and then provided they commit to retirement saving afterwards (even at a higher rate) then that is appropriate.

The whole concept of 'saving for your retirement' screams financial illiteracy.

The game is to maximize net worth while you're working. The more the better. In a form that is safe (including safe from erosion by inflation, so cash based kiwisaver not necessarily safer) and that can be realised as usable cash if needed.

Hi Simon
I agree with you and I am now enjoying a comfortable retirement.
However, while agreeing with you , I think life is not just about “maximising net worth”.
It is more important to keep a balanced life. I can look back on my life knowing that I have had many memorable experiences and especially enabling my family to also have a quality of life.
It is important that one enjoys life but keep a balance between having experiences and ensuring financial security including that for retirement. No doubt there are some Scrooge McDucks t(Walt Disney character for those too young to know) to an equal or slightly lesser degree who will want to accumulate as much as possible, swim in their vault of money, and be happy with that.

Only when you don't realise by "saving" they actually mean investing. If you just put all your money in a savings account for your entire life you are indeed financially daft.

Oh really, so that 30k left to compound at 5% earns you more than the 400k first home has done past 5 years compounding at closer to 10% ?

How much tax are you paying on every bit of kiwisaver profit v. gains from first home?

As far as net worth goes you'd be an idiot to have not taken advantage of this scheme to get on the property ladder asap. If only for the money saved in rent.

Reduce or defer tax on Kiwisaver, that would be a decent step. Instead, we had National's miserly approach to taxing our employer contributions.

"Instead, we had National's miserly approach to taxing our employer contributions."

Of course, because they gave massive unaffordable tax cuts going in to the worst recession the world has seen in living memory, so they had to scramble around for any scraps of money they could get their hands on and think that people wouldn't notice. They put up the minimum contribution rate from 2% to 3% at the same time so people on the 33% tax rate watching the numbers going into their account each month wouldn't notice a difference.

Or: counterpoint: now those people have somewhere to live. I can't live in a bank vault that is locked away until I turn 65, nor can the family I've had to put off.

Ummm.....well it is actually a very well known fact. However people have to make choices and prioritize, my view home first retirement savings second.

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"Kiwisaver for a home deposit is just 'pushing the problem of retirement affordability down the track' for future generations"
Well Doh.
But of course this was implemented by those bastions of clear business thinking. Even better it was an election bribe using the voters own money, classic, and people ate it up voting them back in. As well as adding a grant to add $10,000 to every house price.
Along with stopping payments to the super fund. Definitely here and now thinking and bugger the future, but again it was an easy sell.

Fund managers getting grumpy that more and more fee earning funds are being removed by FHBs.

I'd rather have a mortgage free home at retirement than 500k in kiwisaver - esp when you estimate rent and house prices out to your retirement age

You're an idiot if you can't manage to get mortgage free and save for your retirement at the same time though.

Kiwisaver withdrawals are not good. However home ownership is the best investment you can make - given the opportunity for adding sweat equity.
So, excusable, if not great.
Some other measures would be helpful for Kiwisaver. Make it universal and lift required contributions markedly.

Thank God for all these high-wage jobs and disposable incomes people have that they can comfortably pay a payroll tax for being under a certain age.

Oh wait, no they don't.

I always find people insist Kiwisaver contributions be both higher and mandatory don't really have an answer on how people living paycheque to paycheque as things stand would make ends meet. Oh to be a technocrat.

People who don't contribute to Kiwisaver often can afford it, but don't because they can't do the simple sum. Helpless. See the example of civil servants above who did not join the highly subsidised pension scheme. Well paid but too lazy to work it out. Gave away free money.
As for people on really low incomes, including benefits, they are the ones who really need to be in Kiwisaver.

In conclusion, we should allow FHBs to borrow (for their deposit) against their future Kiwisaver savings. I.e. drive it into a negative balance, that will be recovered through minimum contributions 2/3/4% as time goes on.

How on earth does that help anyone? Juicing the housing market a bit more, so FHB are likely unable to pay the mortgage off before retirement, and also arriving at retirement age with a zero/minimal kiwisaver balance..

True. We should instead be working on increasing supply / reducing speculative demand in order to make housing more affordable for average Kiwis...exactly as was done for previous generations of New Zealanders. It should not be all about protecting or enlarging nest-eggs for speculators, at the expense of younger and upcoming generations of Kiwis.

Oh - My comment was erm tongue-in-cheek, perhaps I was hoping it would sound more preposterous than it does.
The system in place of withdrawing kiwisaver balances for a home purchase is clearly only negative in a subtle manner, on the surface it seems to hurt no one in particular - which probably means it hurts everyone.

Extending this with more fuel from a sneaky way to raise more deposit is clearly a bit insane, but again I bet it would be a much easier concept to slide in politically than the ideas of capital gains tax, or actual immigration reform.

Fair enough, i may have miataken you for one of the spruikers that would honestly advance that as a good idea...

All markets go up and down. Who is in the better position?

1. FHB that pulled cash out of kiwisaver to buy a house the day before the crash?, or
2. Kiwisaver that stayed in during the crash and lost most of their cash anyway, and who will now be paying rent until they die?

Ultimately it comes down to personal preference. No-one forces FHB to withdraw from Kiwisaver, but they should have the option. After all, whether you like it or not, it is their MONEY.

You move your Kiwisaver/retirement investments to a more conservative plan as you approach retirement for exactly that reason.. when you are just about to retire the bulk of your money should not be in volatile equities, they should be far more biased to stable fixed return investments at that stage.

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Kiwisaver was meant to be a compulsory saving so that whatever happened, good or bad, with any investments you made over your lifetime (including housing), and that irrespective of poor choice, bad luck, getting caught on the wrong side of economic cycles outside your control, or the fickle finger of fate, then you would have a guaranteed backstop come your retirement.

It protected you, and all ratepayers who would have to pick up the shortfall.

The only exception for early release of this money was for a financial emergency.

The fact that Central Govt. has allowed it it to be used for housing was an immediate red flag and it is was admittance that we are in emergency territory with housing.

.. if either side of the political debate had their heads screwed on right they'd have just copied the Aussie compulsory super saving scheme ... it's a far better scheme from a taxation point of view ...

"Kiwisaver was meant to be a compulsory saving so that whatever happened, good or bad, with any investments you made over your lifetime (including housing), and that irrespective of poor choice, bad luck, getting caught on the wrong side of economic cycles outside your control, or the fickle finger of fate, then you would have a guaranteed backstop come your retirement."

Really? tell that to all the people that retired in Australia in 2008. Many lost upwards of 50% of their compulsory "guaranteed backstop" so ended up returning to the workforce.

My point is that nothing is guaranteed. Especially not super schemes.

Good Point. It would be interesting to know how many of those Super schemes then, and even now, had invested in 'property' type investments.

Allowing more money into the system of course was going to be inflationary. And how will people live in retirement? Of course this is a bad idea but I have not seen the current government do anything about KS yet.

Well sure, using Kiwisaver for a home deposit will turn out to be a terrible idea if the market declines significantly and doesn’t recover for many years. I’m sure many FHBs have not been adequately warned of that risk in the current environment, quite the opposite.

But the same is true if the stock market, bonds, etc., decline significantly.

Nope, your KiwiSaver probably isn't leveraged to the hilt. A 20% share market drop might cost you up to 20% of your KiwiSaver. A 20% housing market drop will wipe out a typical FHBs equity, and probably put them into negative equity.

Negative equity doesn't matter for FHBs.

We are constantly told that access to housing isn't about making money, and that it's all about security and stability etc. Day to day fluctuations in house prices therefore shouldn't matter for owner occupiers.

KiwiSaver is a bit of a trojan horse. The more people save in KiwiSaver, the more it will be cited as one more argument to undermine the universality of NZ Superannuation and reduce it to a means-tested benefit for the aged improvident. Anyone who supports NZ Super's continued universality should welcome KiwiSaver being able to be tapped to buy homes and to meet other important needs that will arise through life on the way to 65.

NZ Super isn't sustainable in its current form, needs to go to a means tested basis. The sooner the transition starts the better.

Not to mention the relative size of the tax base needed to sustain the higher proportion of retirees going forward. It's certain that NZ Super will go the way of the moa.

means tested. then why should i pay taxes for those who have not bothered to accumulate other funds for their retirement. Nothing in nothing out.

Why should I fund the retirement of the generation that profiteered from blowing out the basics of living costs like shelter or education to line their own pockets?

If Super becomes means tested then what's the point of staying in NZ?

People are taking on mortgages with repayments higher than half their income. At the same time they have NO savings in the bank, credit card payments, car payments, children, etc.

To top if off they've punched compounding interest in the face via withdrawing their KiwiSaver. Such people come to find Murphy has moved into their spare bedroom.

They buy at the top of the market and while interest rates are at historic lows. People even take out 30 year terms .. sometimes only making interest payments. Rates are going up, Insurance is going up .. "hey let's buy a new lounge suite" ..

This is a capital STUUUPID !!

While I disagree that you should be able to take out your KS for a house deposit, I definitely will be in the coming years. I actually do not understand how a couple on an average NZ salary can save a 20% deposit without the KS employer contributions + govt top ups.

For many it will be impossible. Which means certain folk in parliament will push hard for more and more wealthy immigration, and the complete removal of LVRs etc. in order to protect their portfolio values and have someone to buy properties off them at high prices.

It doesn’t really matter where you get your funds from for a deposit on your first home.

People that don’t own their own home when they retire are going to have a miserable retirement in reality.
Your home is then available once you have good equity to leverage to buy investment properties, so effectively no money needed as a deposit on them.
Providing you are a clued up investor it will provide you with a far better return than any KiwiSaver return.
Yes I realise that many will say that is not true, however I can assure you providing you are investing in property correctly it is!

"People that don’t own their own home when they retire are going to have a miserable retirement in reality." Well said TM2. But leave off with the speculator advising.