Q: I imagine that my predicament is what many middle-income homeowners living in provincial towns may be experiencing and wonder if you could guide us with our next move.
Living within our means, we bought a property in 2009 for $217,000. At the time it had a rateable value of $281,000. However, as smaller towns have been hit hard with the not-so-property-boom, it now has a rateable value of $227,000, which I know we would not get if we were to sell it tomorrow.
My husband and I have a combined income of $106,000 and one dependent child to support through tertiary education.
My question is: are we better to sell now before the house loses more value, rent and save the difference for our long-term security? Alternatively, are we better to hold on to it and think of it like a rent?
We have $62,000 equity, although in today's housing climate I feel this means nothing. My concern is that over time, if it devalues even more, we will be starting to run at a loss.
A: I would stay put for three reasons:
• Prices in your town might not keep falling. They might even rise healthily in due course.
One of the most common financial mistakes people make is to assume current trends will continue. Those in Auckland think their house values will keep soaring, and people in smaller towns think theirs will keep falling.
But at some point, both trends might change. Immigration into Auckland might slow. Also, as the gap between Auckland and small town prices widens, more people might move out of Auckland, buoying provincial prices.
Some Aucklanders won't be able to move because they can't get good jobs beyond the big city, but the growing number of retirees are free to live anywhere. Your town might become "the" place to reside.
If you sell now and rent, and prices rise later, you might find it hard to get back into the market.
• Even if prices don't rise in your town, does it matter? You'll keep paying off your mortgage and you'll end up with a mortgage-free home, hopefully before retirement.
Although it might be hard then to sell up and move to a big city, will you want to anyway? As long as you're in the housing market you want to stay in, the ups and downs in house values probably won't affect you much.
• Presumably, once you retire, you'll prefer to own your own home so you're not at the mercy of a landlord who can kick you out or limit what you can do to the place.
If that's the case, you'd be taking on more expense and hassle by selling now and buying later than if you stay where you are.
Bank v shoebox
Q: I had a laugh at "The Reserve Bank is confident the New Zealand financial system is sound and it's unlikely a New Zealand bank will fail" in your response to last week's letter about bank shares v bank deposits and the bank haircut issue.
The BNZ was very sound too a few years ago and fortunately was able to get back on its feet, thanks to a massive Government (taxpayer) bailout. South Canterbury Finance, although not a bank in the usual sense, was also very sound but wasn't able to get back on its feet after a massive Government (taxpayer) bailout.
Shoebox under the bed or cash in the freezer is probably safer, as long as the guard dog is doing its job properly.
A: A Reserve Bank spokeswoman responds: "We're not keen on entering a 'we said, he said' exchange on this matter. We stand by our comments.
"Yes, there have been financial institution failures in New Zealand in the past and we cannot guarantee there won't be more in the future. But we are comfortable that currently the New Zealand financial system is sound and that it's unlikely a New Zealand bank will fail."
I'll add a little more. The BNZ bailout was in 1990 — a bit more than "a few years ago". Two years later, National Australia Bank bought it. And no doubt, much was learned from that episode.
And South Canterbury Finance was far from a bank. Also, it wasn't bailed out — but let's not get into all that.
On your shoebox comment, the Reserve Bank spokeswoman says: "Keeping cash under the bed or in the freezer is not a recipe for long-term wealth creation."
Obviously you miss out on interest. Then there are the dangers of flood, fire, earthquake or eruption. The odds are small, but so are the odds of your bank failing.
It's more likely your shoebox will be stolen. Not everyone wants a guard dog and — as you imply — not every guard dog guards.
Suit yourself, but my money's staying in a bank.
Q: Can you tell me if I can withdraw my KiwiSaver during maternity leave to support me while not earning an income?
A: You've broken a basic rule about investing. Before putting money into anything, find out when and how you can take it out again.
In KiwiSaver, there are two main circumstances in which you can withdraw money: to buy your first home, or to spend in retirement. You can also withdraw some or all the money if you suffer significant financial hardship or serious illness, or if you leave Australasia permanently. And when you die, the money goes into your estate.
I'm afraid maternity leave isn't on the list. However, your contributions will stop when your income stops.
Keep in mind, though, that if you can manage to put in enough to get your total contributions to at least $1,043 in each July-to-June year, you'll receive the maximum $521 tax credit.
Meanwhile, you might want to join up your baby. More on that in the next week or two.
Gifts and loans
Q: With regard to the conversation around giving or lending money to offspring, I may have a word of caution.
Say I am of retirement age, and decide to give or lend money to one of my children or grandchildren. I then suffer an unexpected health event, a stroke, say, and have to move into residential care.
Having divested myself of much of my nest egg I now want to apply for a residential care subsidy. Will Work and Income accept that I gave away my money in good faith and pay up?
If the answer is no, because the money is deemed to still belong to me, then shouldn't one think hard before indulging in such generosity lest it comes back to bite you?
A: Good point. You're referring to the government subsidy that helps to pay for long-term residential care in a rest home or hospital — if you're eligible.
Work and Income assesses the assets and income of people who apply for the subsidy. And assets that are counted include loans made to other people (including family trusts).
On gifts, Work and Income says, "If you or your spouse/partner give away assets, they still may be counted as assets in your financial means assessment.
"You can gift up to $6,000 within a 12-month period in each of the five years before you apply. This applies to each application for the residential care subsidy.
"For example, if you and your spouse/partner apply for the residential care subsidy, then gifts of $6000 each per year can be excluded.
"Gifts of more than $27,000 a year per application made before the five-year gifting period, may be added into the assessment. For couples, gifting is $27,000 in total — not per person."
These rules are obviously designed to prevent well off people from lending or giving away money to make them "poor" enough to receive a residential care subsidy.
For more information on the subsidy see tinyurl.com/residentialcaresubsidy.
What does this all amount to? If you're comfortably off, you might consider it unlikely you'll ever apply for a subsidy anyway, and ignore all this.
But if you're not in that privileged group, and you lend money to family members, it would be a good idea to tell them — in writing so they have a record of it — that if you find yourself applying for a subsidy you may ask them to repay the loan fast. Hopefully that will encourage them to think about where else they might borrow the money if needs be.
When it comes to gifts, it would be wise not to give more than $27,000 a year, whether you're in a couple or on your own.
Second, if your health isn't great and you think you might be applying for a residential care subsidy within five years, you might want to limit your gifts to $6000 a year.
And regardless of your health, I suggest you tell recipients of gifts over the limits that — if you end up in care — they might consider giving some back to you. Otherwise, you could find yourself struggling financially but with no subsidy. Let's hope that lucky recipients of loans or gifts from their parents would be only too happy to help them out in such a situation.
To help with your thinking on the chances of ending up in care, here are some numbers. Use of residential aged care rises sharply as you get older. In the 2006 census, only about 1 per cent of people 65 to 74 were in care, and 6 per cent of people 75 to 84. Even for 85-pluses it was only 21 per cent — interestingly 29 per cent of women but only 10 per cent of men over 84.
However, you get a somewhat different picture if you look at the proportion of people who use care in their lifetime.
University of Auckland senior research fellow Joanna Broad looked at data on where people died. "It seems that of all deaths among people aged over 65 years in the years 2003 to 2007, 38 per cent died in residential aged care," she says. "This rises from 17 per cent of those aged 65-74 to 33 per cent of those aged 75-84, and to 55 per cent of those aged over 85.
"Further, in the same period 34 per cent died in an acute hospital. If, say, one in four of these were admitted from residential aged care, more than 45 per cent will have used residential aged care in their lifetime." And the older you are, the higher the odds.
Keep in mind, though, that Broad found that the use of care has fallen markedly over recent decades, largely because people's needs are now assessed before they go into rest homes and more are given home-based support instead. And this trend seems to be growing.
More on family loans next week. The letters keep coming in.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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 that any reader may suffer from following it. Send questions to firstname.lastname@example.org 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.