Opinion: Young Kiwis are choosing a housing bubble now over retirement income later - and Nick Smith thinks this is good

By David Hargreaves

Soaring numbers of young Kiwis are now raiding their retirement savings to climb into a rapidly inflating housing bubble - and the Housing Minister thinks this is a good thing.

I try to not be surprised by anything, but I was astonished when Nick Smith came out over the weekend applauding the fact that close to 11,000 young New Zealanders had cashed in KiwiSaver retirement savings to buy houses in the past year.

This to me is the clearest indication so far that this Government is actually keen to foster a housing bubble.

When all is said and done, if house prices keep surging the way they have recently for the next couple of years, everybody will feel wealthier and happy and they won't be inclined to vote for a change of Government.

This on the part of the Government is absolutely reckless short-termism at the expense of the future of the country.

Here is a quote from Nick Smith that demonstrates his attitude: "My message to young people aspiring to own their own home is that KiwiSaver works. It is a very positive result that to date the initiative has provided NZ$217.6 million of people’s own savings and government grants towards the purchase of a first home."

Now some of us thought that KiwiSaver was designed for New Zealanders to provide for their retirement. But just in case any of our young were under such misapprehensions, here we have a senior representative of the Government telling everybody it is a good thing to pull money out of a diversified investment plan that's aimed for their retirement and plonk it into property.

There are two distinct problems here. On the one hand there is the riskiness of people withdrawing long-term eggs and putting them into the housing basket.

On the other hand there is the fact that the poor old Reserve Bank is straining to put out the housing market fire, while the Government - judging by Smith's words - is pouring petrol on it. Remember too, that Prime Minister John Key has already demonstrated that he is at odds with the RBNZ over its plans to introduce "speed limits" on high loan to valuation lending. Key thinks first-time buyers should be exempt. The RBNZ doesn't want exemptions. See here for all our articles on the RBNZ's new "macro-prudential tools".

It appears to me that the RBNZ is going to have its work cut out reining in the housing market if it is actively working against the wishes of the Government. I would suggest the battle (both against the housing market and the Government) is already close-to-lost for the RBNZ and we are already heading for interest rate hikes that will be sooner (my guess is before the end of the year) and bigger than most people currently anticipate.

And as the RBNZ tries to play catch-up with the rising housing market and ensuing inflation, who will suffer most? Why the people who grabbed every cent they could and put it into a first home of course. They will be the ones most slugged by higher interest rates.

Clearly for some people, particularly the very financially disciplined ones, dragging a lump sum out of KiwiSaver now and putting into a first home will work. But for the less disciplined, who will be swapping a lump sum of savings for massive debts, there will be trouble ahead.

Even the young people who will do okay out of buying a first home now should consider the fact that by dragging say NZ$20,000 out of KiwiSaver now they will be reducing the cash pile they get from the scheme upon retirement by probably a six-figure sum, such are the ways of compounding interest.

KiwiSaver has been a very welcome addition to the New Zealand landscape. Anything that encourages financial literacy is good. Anything that encourages Kiwis away from the state-of-mind that says housing is the ONLY investment is good also.

Now we have a Government saying, in effect, don't worry about diversifying your investments, just chuck all your assets into property. This will not end well.