Banks should cope if housing dives

It doesn't seem necessary to bury your money in the back garden. Photo / Getty Images

Whatever lies ahead, your best bet is to avoid any position in which you have to sell - mortgagee sale or not.

More and more Aucklanders are leaving town, buying great properties in the provinces and finding that they have money in the bank for the first time. It's a great feeling to pay off the mortgage and enjoy life more.

Just a question though: if the Auckland property market dropped by 50 per cent, as discussed in the Herald recently, surely many banks would collapse with the number of mortgagee sales that would eventuate.

The losers would be those who borrowed in the millions for a do-up that would be a joke outside Auckland.

Could the banking system fail in the event of a major property collapse? And where should we put our money so that we would be protected from a banking meltdown?

It 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, while 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.

Unseen power

Thank you for your article last week about KiwiSaver ... at least someone understands!

I'm a single mum, and all I want is a good solid future for my daughter. Her Dad left for Australia five years ago (that's exactly after she was born) - he never phoned, texted, skyped or emailed his daughter.

When I went to a provider to sign her up for KiwiSaver, I was told I need his consent. The more I explained he is not a part of her life and never has been, they just wouldn't budge. What's upsetting for me is that I am concerned about my daughter, her dad doesn't give a damn. How is it that someone that has no interest in his child can have that much power to decide whether or not my daughter is allowed a KiwiSaver account?

He is not there to wipe away her tears, or when she is ill or has nightmares, let alone to pay school fees, clothes, food and every daily life needs - not to mention no child support to date. Yet he gets to decide that (without his signature) she can't have a good start to life.

Oh well, I hope things change. We only want the best for our kids.

Indeed 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 legal brains out there with ideas?

Age gap

I read your article last week about kids and KiwiSaver. My daughter started a casual retail sales job in the Christmas holidays last year. She was offered a permanent part-time contract in February. From her first pay she had KiwiSaver deducted and as she wanted to join, we didn't do anything about it.

However, she was 15 years old at the time. Both her employer (major Australian retail group) and the IRD clearly knew her age. We had to supply a birth certificate to get an IRD number so she could actually get paid, and she supplied her date of birth to her employer.

My question is, if I didn't sign permission for her to join, will this be a problem at any point in the future - that is, being told that as she never joined up properly, she can't get full functionality of her KiwiSaver account?

Your advice would be appreciated.

All 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.

In the main

I thought that, after reading your remark about the difficulty of living on NZ Super alone, my experience might be worth writing to you about - even though some of it is not at all relevant today, and you quite probably won't publish it anyway because it's not "mainstream" enough.

My working life was spent, before retirement three years ago, as a world-class artist/craftsman, which, while being artistically and aesthetically very satisfying (and liveable), never generated a lot of financial rewards.

And so I was forced to learn/figure out how to do almost everything for myself - carpentry, being an auto mechanic, tool-making, etc.

Thirty-plus years ago I bought a nice piece of land in Westieland suburbia (worldwide the cheapest land prices are always in the western suburbs - working people have to drive both to and from work with the sun in their eyes) and paid it off.

I was briefly able to hold the title deed in my hand, before giving it back to the bank manager and signing up for the small, $10,000 loan that, together with the $4000 "government gift" building suspensory loan and child-benefit capitalisation was needed to pay for the materials to build a warm and sunny 150sq m home.

I designed and built it myself over two or three years, complying with all building code requirements. At that time the median building price was about $1000 a square metre, but I managed to build this house for my family for not much more than 10 per cent of that - using second-hand joinery, fittings, etc - but with good, new, treated framing.

So, having lived my whole life doing almost everything for myself, I find, now that the neo-Hayekian capitalist dictatorship of the NatLab party is paying me 40 bananas a day to breathe, that I'm slightly better off than I have ever been during most of my life!

My current main problem, besides paying for gold crowns, lies in optimising which single malt whisky to buy whenever I use friends and family, who are quite happily wrecking the planet, to keep up my stocks via duty-free shops. Single malt quality control - it's a difficult job, but ...

"PS. Another friend of ours in Hamilton is also saving money on the pension - another freehold house, "do everything yourself" sort of person.

I'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.
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Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss 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.