| Period | May 2011 | May 2010 | Dec 2010 | Dec 2009 | Dec 2005 |
| Rental income | $330.00 | $320.00 | $320.00 | $310.00 | $280.00 |
| Mortgage payment | $269.58 | $272.47 | $276.72 | $282.29 | $277.09 |
| Mortgage interest | $183.55 | $187.56 | $196.78 | $196.79 | $223.29 |
| Rates & Insurance | $27.03 | $23.96 | $25.39 | $24.05 | $19.19 |
| Maintenance | $10.12 | $9.60 | $9.81 | $9.30 | $8.40 |
| Cash flow performance | $23.27 | $13.97 | $8.08 | -$5.64 | -$24.68 |
| Depreciation | $0.00 | $47.88 | $47.16 | $49.04 | $40.52 |
| Operating performance | $109.30 | $51.00 | $40.86 | $30.82 | -$11.40 |
| Income tax | $32.79 | $15.30 | $12.26 | $10.17 | -$3.76 |
| After tax income | $76.51 | $35.70 | $28.60 | $20.65 | -$7.64 |
| Investment | $82,088 | $82,170 | $80,933 | $84,150 | $69,527 |
| ROI (excl gains and losses) | 1.47% | 0.88% | 0.52% | -0.035% | -1.85% |
While some individual properties may have fared relatively better than the national ROI average on residential property, Chaston said the overall landscape suggests this is "not the time for this asset class.''
Rental revenues fall short of hitting sweet spot
"Rents may be high and rising, but they are still not enough to cover the normal operating costs - even after depreciation expense is no longer provided for.''
Central Otago Lake was an exception said Chaston. He said the removal of depreciation deduction had the effect of pushing ROIs in that region into positive territory in April and May.
Chaston said national returns have also been dragged down by Auckland, Waikato, Bay of Plenty and Nelson/Malborough where returns are in negative territory.For residential property to reinstate itself as the darling of the investment space it was five to seven years ago, either rents (limited by their affordability) will need to rise "significantly" or property prices will need to fall significantly.
| Real property investment retuns: | ||||||
| net returns after tax, excluding capital gains | ||||||
|
May-2011
|
Apr-2011
|
May-2010
|
May-2009
|
May-2008
|
May-2007
|
|
| New Zealand |
1.47%
|
0.57%
|
0.88%
|
0.10%
|
-4.14%
|
-5.04%
|
| Northland |
1.15%
|
2.64%
|
-1.63%
|
-2.25%
|
-6.58%
|
-7.04%
|
| Auckland |
-0.74%
|
-1.30%
|
-1.26%
|
-2.10%
|
-6.26%
|
-6.09%
|
| Waikato/BOP |
-0.42%
|
-0.84%
|
-0.22%
|
-1.59%
|
-5.07%
|
-5.44%
|
| Hawkes Bay |
2.70%
|
5.35%
|
2.00%
|
3.37%
|
-2.23%
|
-2.46%
|
| Manawatu/Wanganui |
3.43%
|
3.59%
|
1.85%
|
1.27%
|
-2.47%
|
-2.49%
|
| Taranaki |
3.29%
|
3.85%
|
1.54%
|
0.84%
|
-3.72%
|
-3.52%
|
| Wellington |
1.73%
|
1.59%
|
0.53%
|
0.73%
|
-5.09%
|
-5.94%
|
| Nelson/Marlborough |
0.17%
|
-1.17%
|
0.16%
|
-1.12%
|
-6.24%
|
-6.53%
|
| Canterbury/Westland |
1.87%
|
0.62%
|
0.76%
|
-0.12%
|
-3.80%
|
-4.84%
|
| Central Otago Lakes |
3.71%
|
-2.87%
|
1.11%
|
-1.01%
|
-7.15%
|
-7.14%
|
| Otago |
3.29%
|
3.67%
|
4.11%
|
2.85%
|
-2.35%
|
-3.44%
|
| Southland |
3.83%
|
2.84%
|
4.80%
|
3.77%
|
-3.95%
|
-2.06%
|
Local Authority income
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44 Comments
..."To be competitive with other asset classes, some investment experts (including financial advisor and bestselling writer Martin Hawes) suggest returns should be at a minumum of 7% after tax with 9% being the "sweet spot.""
Isn't that a bit like the tail wagging the dog?
If the mathematics tell you that rental housing isn't as profitable as you think you would like, then perhaps it simply isn't such a great investment.
While my evidence is more anecdotal, investment rentals in stable markets (where housing price is stable) are quite low.
Yes this analysis beggars belief!
By my reckoning even this staged example shows a 6.9% pre-tax ROI!
And why no capital gains return? Would you ever analyse returns on a share portfolio without including capital gains?
If this property appreciates just 2% per annum over the life of the investment (less than inflation) then that is another 6% tax free ROI (assuming 2/3 loan to value ratio).
So in total there would be a 12.9% before tax ROI and a 10.8% after tax ROI.
That doesn't seem so bad to me!
(And yes I'm aware that sometimes property prices go down, but over the longterm that has not been the case in NZ. And if you just want to talk about the short term then in many years property prices have gone up a great deal more than 2%!)
The table of real property investment returns highlights the solution ........ Invercargill !
....... getcha fat lazy property spruiking arses out of Yuckland , and waddle on down to Timmy's Town .
Fresh air ....... real bracingly fresh , Bluff oysters , the Burt Munro motorcycle collection , Southland has it all . And as the table shows , table-topping housing rentals , year after year .
........ And it's so clean in Invercargill , no littler in the streets , no rubbish anywhere ...... the great southerly gales just whip that stuff right outta there , and send it to Dunedin .
I went there once....its cold and bleak....and Im being polite on what I think of it, easily the most un-pleasant winter days ive spent somewhere in NZ...
....but in terms of being a PI I would assume the rates are quite low, houses are quite cheap? and the population stable and reasonably well paid.....What would happen to it if the smelter shutdown though?
regards
I've got a data point. The place that we rent has just been listed for mortgagee sale, I have no idea how many other properties the owner had.
My back of the envelope calculation suggests that he should have been making a 5% return on our place in Rotorua, he must have blown it in cities where housing is more expensive. I gather though he had problems with unpaid bills and damage from the previous tenants; one of the risks of being a property investor.
Ancedotal evidence suggests that a lot of PIs aren't keeping up with their bank payments now that the capital gains are gone, it would be interesting to see some figures.
And perhaps the banks are being a little bit quiet about what's happening in the property world? Ring any bells:
fortunately in Auckland we don't have this problem... there is a massive housing shortage and landlords can charge as much as they want, particularly in the greater city centre. A home doesn't have to be leak free to get desperate tenants throwing bunches of cash at it. High immigration and refugees fleeing Christchurch are just ramping up that rental bubble... punters need to rush out and buy now... not tomorrow... NOW! If they don't want to be paying double the rent next year... making the average weekly rent in the big smoke 950 sweet smackers...
Thanks for the inside word Olly!
When has "Three bedroom house, lower quartile purchased in good condition and rented as median rent. Mortgage on two-thirds of the purchase price, amortised over 25 years with weekly payments on a variable interest rate" EVER been a good rental investment guide - what rubbish !.
Rental investment is all about the number of units you can put on a piece of LAND.
A far better indicator would be a three unit property investment as a guide.
How do you make money from renting a single house ? - the yield can never be there.
Apart from Auckland , residential rentals nation wide will be very tough.
you have to specialize , l have a large 7 bedroom house north dunedin.
with senior students, fully set up , returning 11% gross , 8%before tax.
so it dosnt really matter short term house price fluctuations (5 years).
long term , 10 years + , things are sweet . students are back every year.
52 week lease. cheers gecko..
I don't care what garbage the PIs spout, for the most part property investment remains a very poor choice at present. And I think rental gains have hit their limit for the time being. Seen plenty of significant rent reductions in the grammar zone recently - clearly landlords who believed the hype from the likes of Olly, but the reality does not match the hype
Quite, MIA! The unit next door was vacant for 8 weeks last Christmas, and the building manger dropped the rent $50 to re-let it . Last weekend, the new tenants ( 3 singltons - a policeman, a dental nurse and another of unknown trade)) moved out. It might be time to saunter down for another rent review if it stays unlet for a couple of weeks :)
Bigger picture Matt....once the cost of credit reflects the piigs and USA fiasco, affording a mortgage here will be far tougher and the peasantry will move toward renting...OllyN is likely to be right there. But his point has always been that buying property should be done when prices are low and then only in the right places.
Also there is likely a tipping point where the % renting supports a 'landlord nation' which dominates the market, keeping prices high and so porking the rental demand. If there are bugger all privately owned properties and a govt policy that supports landlording one way or another, then what chance has the peasant.
On offer is a 3br semi rotten cement board clad Rhubarb and mold house in grottsville two hours commute from any work what so ever, or one of OllyN's inner city apartments ten minutes walk from plenty of jobs, a rental that is safe, clean, mold free and distant from the thuggish car wreck covered suburban nightmare.
Take your pick.
Wolly, I think the "big picture" you put forward is....unusual....yes I expect credit to be very hard to get because in a credit event aka the Great Depression this was the case....and we have a credit event looming.....So not even PIs will be getting credit and in fact if the admittedly small view I have from the last 3 years is anything to go by, PIs will find it harder than first time buyers to get credit they look/seem to be mortgagee sales fodder....so what will happen is a property meltdown....Olly will be totally wrong.....and I believe you.....50% collapse in house prices maybe as much as 90% If Nicole Foss is correct....
Olly is right on location, location, location.....but there are many factors determining the location and these will change....cost and availability of transport being a growing one....Driving the Rangee to work when petrol is rationed wont be very easy....MiEV range will be the ideal max....2 hours commute, no one will be doing a 2 hours commute petrol is too expensive now and it will be significantly more so in the future, and even rationed. Those 2 hours away will be tele-commuting or working locally....or on something like the main railway line routes and I doubt the tickets will be very affordable....
regards
Hi MIA
May I ask you investment vehicle of choice?
The last rental I bought (2010) was in the low $260s and I collect $360 per week so a gross yield around 7%. Yes I know not flash and not the the magical 8% NET! But not bad with someone else's money (100% mortgaged) and in less than 20 years its mortgage free and part of my retirement package
Regards,
thats not bad, but not great
what area?
I'd be concerned with that sort of property whether capital losses are a possibility. If it in a very handy location then you probably won't lose value at least.
of course some properties will still stack up - I'm talking in a general sense that property investment is poor at present
my investment? In my wife's business that is doing quite nicely
There's such a thing as price resistance, SK. I know, I owned retaurants in the dim, dark past, and there is always a price barrier that consumers balk at. Maybe $40, maybe $50 ~ but when your customer has gone, it's hard to get them back. The all you can do, is lower the price again!
Exactly....I started to deal with a fastener outlet recently (nuts and bolts) the first guy I delt with gave me good prices with a 25% markup on the catalouge price, not to bad.....then I got the other guy....he told me the prices had jsut jumped and were now x 3 the cat price,,,except now Bunnings are cheaper.....I went and will continue to go to Bunnings....he lost a return customer through greed.....
regards
It is correct that a lot of residential rentals don't make much return on capital, especially if purchased in more recent times, but remember Winston Churchill's comment 'that democracy was the worst form of government he knew except for every other form'. My experience in NZ is that property has been the worst form of investment except for every other form.
Not deliberately. Easy to push buttons when property is such a sacred cow in NZ. Still think this guy has his finger on the pulse of where future prosperity will be found -- http://www.caseyresearch.com/editorial.php?page=articles/keeping-capita…
For all the posters here who decry the residential property market for being the cause of all of NZ’s economic woes, I would have thought that you would be celebrating this news? After all, what better news could there possibly be that the returns from residential rental properties are simply too poor to justify them as an investment? What better encouragement could you have to stop people speculating in property?
And all without a capital gains tax in sight too. Who would have thought it?
Between you & me , DB , house prices are only a proxy for the inflation rate , aren't they . This lot at interest.co.nz twitter on endlessly about what is an unproductive asset .
.. In any mature economy ( such as NZ ) if house prices consistently out-pace the CPI then we either have a catch-up from a previous period of underperformance ..... or we're in a bubble ....
..... now , at the risk of having the gang here kick my Gummy nuts in , I'll just express my opinion of the residential housing market in New Zealand and in Austrailer .....
........................blup - blup - blup - gurgle - yurgle - blup ..................
This is such a weird piece of analysis!
You should do a story on the sharemarket next. Here is your headline:
"Share prices have to fall "significantly" to make shares an attractive investment"
I suppose if rental property prices went up 10% this year that will make them an even worse investment - except if you own one!
I just got 90% finance for a home and income property investment in South Auckland. Bought it very well (below true value as the vendor was leaving for Aussie and needed quick cash) at $290K. After a $10K reno it is now worth $350K. I revalued to 90% again, and have a strong cashflow positive investment even at the 3 year fixed rate I took, and after holding costs I have over $10K spending money! Cool.
So Amanda - just how do you calculate the ROI on this, where I have been paid to do this deal by the bank. I can't do this with deposits or shares. No point leveraging a deposit and too risky borrowing on any NZ share? Try adding value to these too - LOL
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