The Gift of Economic Knowledge

'Tis the season of giving, so the Two Cents' Worth team strapped on their Santa hats and ventured out to answer some of your economic questions.

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KiwiSaver

Tom Blakie is a 16 year-old student from Christchurch who recently started his first job. Blakie was surprised to find that because he's under 18 his employer does not have to make KiwiSaver contributions.

"I think this seems really unfair and just not logical because it disincentives me to save and doesn't get young people into a saving mindset from a young age," wrote Blakie, "It also seems a bit ageist."

Blakie wants to know the reason behind this policy, but even the Commission for Financial Capability (CFFC) didn't know why under 18s miss out.

The Commission is home of the Retirement Commissioner, manages the Sorted website and every three years it reviews all the Government’s retirement income policies - including KiwiSaver.

Managing editor Tom Hartman said right now they're working furiously to get their latest review over the line before the end of 2019.

"One of the draft recommendations that the interim Retirement Commissioner Peter Cordtz is considering is actually advocating for government and employer contributions to begin earlier, when someone starts as an employee.

"We don’t see any reason why that should not be. So we’d agree with Thomas," he said. "We are already lobbying on his behalf."

The Motherhood Penalty

Karen also had a KiwiSaver question, She said if she ruled the world she'd give extra KiwiSaver payments to stay-at-home carers.

"To reflect the value of caring for children to society. It's very idealistic, but is it something the government could consider?" she asked.

"Absolutely," said Hartman. "We know there’s in effect a penalty for parents, I’m being gender-neutral, but we know it’s mostly mothers, women."

Internationally this is called the Motherhood Penalty. In terms of KiwiSaver, stopping all payments for a while can have lasting impacts on how much money you end up with when you retire.

"Another way to look at it is a wealth snowball," said Hartman, "Little by little over time, over decades, you are building this snowball of wealth in order to enjoy it at retirement. What the motherhood penalty is, essentially, you stop building that snowball. You stop rolling it. You stop halfway down the hill."

If you stop work to look after children or elderly relatives, you get no KiwiSaver payments - unless you put money in yourself. But you probably aren’t doing that because you haven’t got any money coming in. Even if you are on paid parental leave, your employer and government contributions stop.

"This is another area we are looking at very carefully, how do you overcome that penalty," said Hartman.

The Commission is considering care credits which might mean a much bigger government contribution or instead of carers having to put in the $1000 minimum per year, maybe for a given amount of time it would be topped up from the government so they would still get a contribution during that time.

"These are all taxpayer funds, so you’d have to prioritise it, but in terms of valuing all that work so society, we’re all for that and we’re thinking a lot about that these days."

"We have high visibility on both of these issues and the main thing is they are high priorities"

Property Prices

Paul wrote in to say: "In the debate around the housing crisis people arguing for a completely open market said that a ban on foreign buyers would have no effect because they were such a small segment of the market. I had thought that this was wrong because the marginal buyer sets the price. So whether foreign buyers are 1% or 3% or 30% every time they outbid the locals they are setting the price that everyone else has to meet. Is this economic fact or fiction?"

Nick Goodall, the head of research at the property research company Core Logic said it's probably fiction.

"If you've got fewer foreign buyers in a market, they're having less of an impact across the wider market. So there are fewer properties at which they might be setting that marginal price."

He said once a foreign buyer has bought, all the other properties will have less pressure on them and they're the majority so will predict the overall trend of where prices will go.

Goodall said if you look at Waitemata and Queenstown, the key markets where foreign investors were active, they made up 18% of buyers before the ban came in. Now they're at about 3% and there has been a price drop in those areas.

But he warns the cooling is short-lived.

"Without the foreign buyers, locals investors are seeing value in that market and prices are lifting again."

Mortgage Rates

Fiona Mulder, a mother of two from Wellington has a question in two parts: "Why there is such a big gap between the OCR and bank mortgage rates. I understand there is a risk level they to cover, as well as their operating cost, but is the rest all profit?! Also, why are floating rates currently so much higher than fixed rates? I’d think it should be lower since banks can increase these immediately to reflect economic changes."

First question first: The banks don't borrow at the OCR rate.

John Bolton is CEO of Squirrel Mortgages says most of the banks' money is coming from retail deposits.

"The Reserve Bank requires that banks have to raise 75 percent of their funding from retail deposits or long term sort of wholesale deposits like bonds and stuff," said Bolton.

"So if you think about a term deposit rate, although the OCR is only one percent, banks are having to pay two point seven percent for term deposit."

"As interest rates have got really, really low, it's become more and more disconnected from the OCR. So we're in this unusual situation where the OCR is incredibly low and it doesn't really have any bearing now in terms of either deposit rates or mortgage rates."

And the floating rate?

So right now, floating mortgage rates are about 5.2% - more than 1.5% higher than the best fixed rates.

Bolton says the reason for that discrepancy dates way back to the early 2000s when New Zealand banks were competing aggressively with each other and used fixed rates to compete.

"With fixed-rate mortgages you're only repricing that part of your book that's in the market at the time, not your entire loan book."

Floating rates are different. When you change your floating rate, you change the pricing on your entire floating book. So the impact on the banks is quite significant.

"It's very difficult for them to compete with floating rates, so they just don't," said Bolton.

Check out the podcast for more detailed answers and a bonus question from a Christmas Grinch.