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Rental yields on residential investment properties have dropped below 4% in Auckland but are still mostly above 6% elsewhere

Property
Rental yields on residential investment properties have dropped below 4% in Auckland but are still mostly above 6% elsewhere

Residential property rental yields have fallen below 4% in many parts of Auckland but are above 6% in other main centres, according to the REINZ/interest.co.nz Rental Yield Indicator for the six months to September.

The Indicator tracks the gross rental yield* that would be achieved if a property was purchased at the REINZ’s lower quartile selling price in 56 locations throughout the country where there is substantial residential rental activity (see the table for below for the yield figures for all 56 locations).

The median annual rent for three bedroom houses in each area is then used to calculate the gross rental return that would be achieved on a lower quartile-priced property in the same area.

September’s report shows that four of the Auckland suburbs monitored by the Indicator now have indicative yields below 4% - Beach Haven/Birkdale 3.9%, Torbay 3.8%, Avondale 3.9% and Highland Park 3.6%, and none of the Auckland suburbs monitored has an indicative yield above 5% (see accompanying table).

That is a significant change from a year earlier when the lowest indicative yield in Auckland was 4.3% and five of the suburbs monitored had yields above 5%.

The underlying figures show that rents in Auckland have risen substantially over the 12 months to September, but have been outpaced by some extraordinarily high increases in lower quartile selling prices, which has pushed down the rental yields.

In the Beach Haven/Birkdale area of the North Shore which has traditionally been a popular area for renters and a happy hunting ground for residential property investors, the median rent for a three bedroom house increased from $465 a week in September 2014 to $495 a week in September this year, an increase of 6.5%

However over the same period the REINZ’s lower quartile selling price for Beach Haven/Birkdale rose from $521,000 in September 2014 to $657,000 in September this year, a massive 26.1% increase in 12 months, which pushed the rental yield down 4.6% to 3.9% over the same period.

Similarly in the west Auckland suburb of Glen Eden, which has traditionally also been a rental hot spot, the median rent on a three bedroom house increased from $410 a week in September 2014 to $450 a week in September this year, a rise of 9.8%.

However over the same period the lower quartile selling price in Glen Eden increased from $420,000 to $574,000, a massive 36.8% rise in 12 months, which pushed the gross rental yield down from 5.1% in September last year to 4.1% in September this year.

Similar if less dramatic trends are also evident in the Waikato and Bay of Plenty.

In the Hamilton suburbs of Fairfield/Fairview Downs the median rents increased 6.1% between September last year and September this year, while the lower quartile selling price increased by 23.8% over the same period, from $246,500 to $305,000.

That combination pushed the yield down from 7% to 6%.

And in Tauranga central and Greerton, the median rent increased 10.6% between September 2014 and September this year, while the lower quartile selling price increased 16.6% over the same period, rising from $290,000 to $338,000, which saw the yield decline from 5.9% to 5.6%.

In other regions the yields have been more stable.

In Wellington they remain above 6% on the Kapiti Coast and in the Hutt Valley and in the mid-5% range in central Wellington.

In the Christchurch suburbs monitored they have fallen slightly over the 12 months to September and In Dunedin they remain above 6%.

The big increases in rents and even bigger increases in capital values that have been evident in selling prices in the upper North Island have brought mixed blessings for investors.

Investors who have purchased recently at very low yields could be vulnerable if mortgage interest rates or other costs rise faster than rents, particular if that is accompanied by a fall in property values.

However those investors who have owned their properties for several years will have benefited greatly from both the rise in rental income and the increase in equity rising values would have created.

The increase in their cashflows would have been magnified by the falls in mortgage interest rates, creating not just a win/win, but a win/win/win situation for them.

However with yields so low, many investors are now wondering whether the capital they have tied up in Auckland residential property is working hard enough for them.

There are increasing signs that Auckland property prices may have peaked and that is causing some investors to cash up and redeploy their capital to other areas where prices are lower and the yields are better.

For some that means staying with residential property but reinvesting in locations such as Rotorua where yields in the suburbs monitored by the Indicator are between 6.6% and 8.7%.

Others are looking at different types of property such as commercial premises where the returns are generally higher than those achieved on residential properties.

But the great majority will probably just sit tight and play a long game, using the increased cash flow from rising rental returns to pay down debt, or simply enjoy the extra income.

*Gross rental yield is a property’s annual rent expressed as a percentage of its purchase price or value, before allowing for other costs such as rates, insurance, maintenance, periods of vacancy and mortgage interest payments. The Rental Yield Indicator uses the REINZ’s lower quartile selling price in each of the areas monitored and the corresponding median rent figure for three bedroom houses calculated by the Ministry of Business Innovation and Employment from the tenancy bonds received by its Building and Housing Division. 

For selected areas with high rental activity during the previous six months.
Yields are for three bedroom houses, unless otherwise stated.
Town/region  Yield %*  Sep-15
Yield %*
Jun-15
Yield %*
Mar-15
Yield %*
Dec-14
Yield %*
Sep-14
Whangarei - Kamo/Tikipunga/Kensington 7.1 6.5 6.9 7.6
6.4
         
 
Rodney - Orewa/Whangaparaoa 4.3 4.5 4.5 4.6
4.8
         
 
North Shore:        
 
Beachhaven/Birkdale 3.9 4.0 4.3 4.3
4.6
Torbay 3.8 4.0 4.5 4.6
4.5
         
 
Waitakere:        
 
Glen Eden 4.1 4.3 4.6 4.9
5.1
Massey/Royal Heights 4.1 4.4 4.6 4.9
5.1
Henderson 4.1 4.4 4.7 4.9
5.0
         
 
Central Auckland:        
 
Avondale 3.9 4.1 4.2 4.4
4.5
         
 
Manukau:        
 
Highland Park 3.6 3.8 3.8 4.1
4.3
Papakura/Drury/Karaka 4.9 5.5 5.6 5.9
6.0
Franklin - Pukekohe/Tuakau 5.0 5.3 5.5 5.6
5.6
         
 
Hamilton:        
 
Deanwell/Melville/Fitzroy 6.2 6.8 6.9 6.9
6.9
Fairfield/Fairview Downs 6.0 6.8 6.7 6.2
7.0
Te Kowhai/St Andrews/Queenswood 5.3 5.4 5.4 5.6
5.8
         
 
Cambridge/Leamington 5.2 5.5 5.5 5.6
5.9
           
Te Awamutu 6.3 6.5 6.2 6.3
6.4
         
 
Bay of Plenty:        
 
Tauranga Central/Greerton 5.6 6.0 6.1 5.9
5.9
Bethlehem/Otumoetai 4.8 4.5 4.8 5.3
5.4
Mt Maunganui 4.7 5.4 5.7 5.6
5.2
Pyes Pa/Welcome Bay 5.3 5.9 5.7 5.7
5.8
Kaimai/Te Puke 6.2 6.4 6.2 6.2
5.7
           
Whakatane 7.3 6.7 6.3 6.7
6.9
           
Rotorua          
Holdens Bay/Owhata/Ngapuna 8.7 N/A N/A N/A N/A
Kuirau/Hillcrest/Glenholme 6.6 N/A N/A N/A N/A
Ngongotaha/Pleasant Heights/Koutu 8.2 N/A N/A N/A N/A
           
Hastings - Flaxmere 11.0 12.1 12.2 11.7
11.8
         
 
Napier - Taradale 5.5 5.3 6.2 6.3
6.1
         
 
Taranaki          
New Plymouth/Moturoa 5.5 N/A N/A N/A N/A
Waitara/Inglewood 8.0 N/A N/A N/A N/A
           
Wanganui 14.9 N/A N/A N/A N/A
           
Palmerston North          
Kelvin Grove/Roslyn 7.2 N/A N/A N/A N/A
Palmerston North Central 6.2 N/A N/A N/A N/A
Takaro/Cloverlea/Milson 7.3 N/A N/A N/A N/A
           
Kapiti Coast:        
 
Paraparaumu/Raumati 6.1 6.2 6.1 6.1
5.9
Waikanae/Otaki 6.8 6.6 6.7 5.5
5.4
         
 
Upper Hutt          
Heretaunga/Silverstream 6.1 N/A N/A N/A N/A
Totara Park/Maoribank/Te Marua 6.8 N/A N/A N/A N/A
           
Lower Hutt          
Epuni/Avalon 5.1 N/A N/A N/A N/A
Taita/Naenae 7.1 N/A N/A N/A N/A
Wainuiomata 7.7 N/A N/A N/A N/A
           
Wellington:        
 
Johnsonville/Newlands 5.6 5.8 5.6 5.5
6.2
Vogeltown/Berhampore/Newtown 5.5 5.1 5.5 5.2
5.6
         
 
Tasman:        
 
Motueka 5.3 5.3 5.5 5.6
5.5
Richmond/Wakefield/Brightwater 5.5 5.6 5.6 5.8
5.9
           
Nelson - Stoke/Nayland/Tahunanui 5.8 5.9 5.7 5.7
6.0
           
Blenheim 6.4 6.5 6.5 6.6
6.5
         
 
Christchurch:        
 
Hornby/Islington/Hei Hei 6.2 6.2 6.3 6.5
6.3
Riccarton 4.9 5.9 5.2 4.9
5.1
Woolston/Opawa 6.6 6.8 7.3 7.2
8.0
           
Ashburton 6.9 7.0 6.8 6.7
7.2
         
 
Timaru 6.2 6.6 6.8 6.7
6.3
         
 
Queenstown/Frankton/Arrowtown 5.0 4.8 4.9 4.7
5.3
         
 
Dunedin          
Kenmure/Mornington 6.6 N/A N/A N/A N/A
Mosgiel 6.1 N/A N/A N/A N/A
South Dunedin/St Kilda 8.2 N/A N/A N/A N/A
           
Invercargill 9.0 6.7 9.0 9.2
9.5

Source : REINZ / MBIE

* Yield is a property's annual rent expressed as a percentage of its purchase price. The yield figures in this table are gross (before allowing for vacancy and for costs such as rates, insurance, maintenance, mortgage interest and tax). The yields are calculated from the REINZ's lower quartile selling price for each area during the previous 6 months, and the median rent for newly tenanted three bedroom houses in the same areas/period which are calculated from new tenancy bonds received by the Ministry of Business Innovation and Employment.

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34 Comments

Another way of writing the headline here is "House prices rising faster than rents are rising."

Life's still good in landlord land lads!

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Gross rent is meaningless. Net rent is what counts,
By the time you pay rates, insurance, repairs etc you would be lucky to get 2% and most people, if they are honest are in negative yields.
Maybe out in the sticks ( including Wellington) you may get a small return, otherwise either rents must rise significantly, or prices of houses must fall.
Take your pick.
Oh - yes, then there is the cost of any mortgage as well.
Go figure.

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Every landlord in NZ is counting/creaming on
1. a tax refund every March
2. tax-free capital gain after every sale
3. weekly rent to roughly balance spends

Residential property investment would not be a great biz without the first two points above.

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And when that capital gain dries up, what happens?

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Unless there would be a sudden and irreversible population shrinkage, I do not see a capital gain dry-up scenario eventualizing anytime soon.

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The capital gain dry up scenario is inevitable and inescapable. It will happen, the only argument is when. Trees don't grow to the sky and sooner or later prices will exceed the maximum ability for buyers to pay.

The thing with speculative markets is that the price rises are self perpetuating as long as the good times last. But when they reach their top there is nothing of substance to keep them up until the yields make sense again.

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Investors don't sell.

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sure, are you taking your houses to your grave with you, of course they sell when the time is right

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Gee sharetrader, are you taking the mickey? Why would I sell?

The house values and rents rise over time, so I make use of the increases in wealth and invest/spend the money.

Where else will I invest if I sell? Where will I invest where I will be as comfortable about where my money is?

Of course I won't take the properties to the grave. When I kick the bucket my kids will have them. It's written in the will. Yes mate... the houses can become theirs to do with what they want. In the meantime, they fund my life.

You don't have a very broad view of investing options do you?

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good for you, hope your children appreciate what you are doing to enrich their lives I'm sure they will enjoy the riches coming their wayAs for me I managed to become a millionaire without taking on any debt on an average wage working 9 to 5 Monday to Friday and not investing in rental houses. And no did not inherit in fact born to poor family and did not win lotto so must have done something right. At least I can enjoy life hassle free and have plenty of time to do it not running around fixing tenants problems

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Well done to you. Not many can say they have achieved what you have.

My kids will be happy, no doubt. For me, it's a way to 'have my cake, and leave my cake for the family', so-to-speak.

I don't find it stressful owning properties. So the key point for me is keep them all, spend the money as I want, AND have something to leave the family.

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Investors don't sell? What an absolute load of tosh. Smart investors buy low and sell hi - plenty of that going on at the moment. I'm quite happy to be out of my Auckland properties - cash may not have the potential upside of Auckland property, but more importantly, I'm largely shielded from the more likely potential downside. On a risk-weighted basis, owning Auckland residential property is fairly indefensible at the moment. Every day you continue to hold an asset, you must be satisfied that you would buy it at the current price - simple as that.

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If someone follows the idea of buying low and selling high then that is speculating. Not investing.

Yes I would buy at current prices. 'Cause one day in the future (when I will still own the property) today's prices will be cheap.

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No - speculating would be buying in a market where values are not backed by fundamentals (i.e. current Auckland property market). Sophisticated investors routinely rotate through various asset classes (including cash) based on their assessment of value and risk profile. It's the ability to make and act on sound valuations that sets a good investor apart from a speculator.

One day in the future, today's prices will look expensive, at least that's the only rational assessment I can arrive at, so I'd disagree with your general premise.

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I hope to learn a great deal from you. I hope that as a veteran landlord you can continuously and unselfishly share your knowledge around please.

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You should read everything you can, observe, think, and then make your own decisions xingmowang.

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time NZ brought in the same measures as the UK,
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let…
In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.

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Brilliant. And tax other businesses on revenue received rather than what is left after expenses are paid?

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Businesses have to pay tax at the Business rate on their net income (after expenses paid) are you suggesting landlords should also have their income included in that amount and taxed at the business rate as well after the allowed expenses taken out, if so yes i agree with that

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do you even know how much the business rate of income tax is sharetrader? Clearly you think it's more than the top personal rate

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yes its flat on the total income ,•28 cents in the dollar for income years 2012 and later whereas your income is taxed at certain rates per level, try dividing your income and tax and work out your actual rate, if not sure
PAYE rates for every
$1 of taxable income
(incl ACC earners' levy
up to $14,000 11.95 cents
from $14,001 to $48,000 18.95 cents
from $48,001 to $70,000 31.45 cents
$70,001 and over 34.45 cents
verses
http://www.ird.govt.nz/business-income-tax/paying-tax/tax-rates/

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You do realize that the business tax rate is lower than the top PIR paid by most landlords? Moving a landlords private (wage) income to a business rate would effectively reduce the amount of tax paid!
I believe that a number of landlords already do this by setting up companies as proxies that get paid in their stead or having trusts that own companies that get paid in their stead if they have family members that they want to apportion their income over in order to get the best possible effective tax rate.

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yes those us with trusts understand this, most mom and pop investors are neg geared and use the tax rebate to offset their income tax thereby reducing the amount of tax they pay

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What is a 'business tax rate'? There is no such thing in NZ. Perhaps you're meaning the company tax rate? A business does not need to be a company! A private individual would need to earn in excess of $145k for their average tax rate to overtake the company rate (28%).

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Try work out what your gross annual income must be if you have even a small portfolio of property ( lets say 3 properties with 400,000 mortgage on each ). for the bank to lend you the 1.2 million they would need you to demonstrate income of over 160,000 pa. ( https://tools.anz.co.nz/home-loans/borrowing-calculator/ )
Do you now understand why we like the company rate and already go out of our way to get it applied to us?

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Yes, it's absolutely more tax effective to structure as a company in that instance and of course, many do - what I was debating was the simplistic assertion that business pays lower tax than individuals. As you'll agree, nothing is simple in taxation!

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I do agree that nothing is simple in taxation, it does my head in every July. I used the term business tax rate to refer to the company tax rate simply because the original poster referred to it as such and I did not want to confuse him.

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The UK's new rules mean property owners will need to have stronger cash flows.

This is very good for investors. I don't think it is as good for tenants though.

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It will mean that the little landlords get pushed out in favor of larger more corporate landlords and raise the barrier to entry for new landlords prohibitively high. It is good for well established landlords at the expense of any future ones & the weaker ones who will end up selling up at reduced rates to the established landlords.

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You assume the tenants can pay more, which I'd suggest is not the case, ergo that points at landlords having a tougher time.

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The last 'umpteen years we have seen home owners pay more and more and more.
Don't worry steven, tenants are capable of doing the same.
Watch what happens as yields on financial investments increase.

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I am surprised you dont understand the difference between rent which has a the max you can pay per month and capital where you can pay more as long as the period of re-payment is longer.

I am not worried by your delusions, not directly anyway, depositors should be however.

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GST?

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Ponsonby villa gross yields are 3%

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