Residential rental yields looking slightly more attractive in Auckland, not so good elsewhere

Residential rental yields looking slightly more attractive in Auckland, not so good elsewhere

By Greg Ninness

Rising house prices have tended to outpace rises in rents, pushing down potential returns for residential property investments in many parts of the country over the last year, according to interest.co.nz's Rental Yield Indicator.

The Indicator tracks movements in the gross rental yields investors would receive if they purchased a three bedroom house at the Real Estate Institute of New Zealand's lower quartile selling price for such properties in 56 locations around the country, and then rented that home at the median rent for three bedroom houses in the same locations (based on bonds received by Tenancy Services).

Figures for three bedroom houses are used because this is still the predominant type of rental property in this country, although higher density properties such as apartments and home units are becoming increasingly common.

Over the six month period from April to September this year, gross rental yields declined in 30 of the 56 locations monitored compared to the same period of last year, suggesting rising prices had outstripped rising rents in those locations.

Conversely, yields rose in 18 locations, suggesting rents rose faster than prices. Meanwhile yields were unchanged in the remaining eight locations suggesting rents and prices moved at roughly the same pace.

The biggest growth in rents occurred in suburbs in Rotorua, Whanganui, the Hutt Valley, Dunedin, and Invercargill, where there was double digit percentage growth in rents for properties that were newly tenanted between April and September this year, compared with the same period of last year.

Rent rises were recorded in 55 of the 56 locations monitored. Queenstown/Frankton/Arrowtown was the sole exception with the median rent for a three bedroom house in that area remaining unchanged at $750 a week making it the most expensive of the 56 locations monitored.

On the price front, several locations posted spectacular gains of more than 30%, including Rotorua (in two of the three locations monitored), Riccarton in Christchurch (Note: the Riccarton numbers should be treated with caution due to the low number of sales which were all at the top end of the market during the latest reporting period) and Invercargill. Flaxmere in Hastings, Whanganui, and two of the three locations monitored in Dunedin weren't far behind, with lower quartile price rises of more than 20%.

However it was a different story in Auckland where prices declined in six of the 10  locations monitored. The declines ranged from -0.3% in Avondale to -5.2% in Henderson, while prices rose in four locations with the rises ranging from +0.8% in Torbay to +6.7% in Papakura/Drury.

The combination of rising rents and lower prices pushed up yields slightly in all of the Auckland locations monitored except Papakura, suggesting residential property in the city has become slightly more attractive to investors over the year.

In the Tauranga district, prices and rents both showed strong growth and as a result the yield trends were mixed with half showing falls and the rest showing rises or no change.

It is notable that in Tauranga itself the yields are now on a par with those in Auckland, suggesting there may not be many bargains to be had, although yields were above 5% in the outer districts of Kaimai/Te Puke and Whakatane.

In the Waikato, price growth has been strong with double digit growth recorded in some areas. Although rent growth has also been above 5% in all areas, the yields were mostly lower and are now in the 4.5% to 5.0% range, even in outlying towns such as Te Awamutu.

Rotorua has been a favourite with investors for some time and recorded spectacular price gains of 11.9% to 35.2%, while rents were up by 11.0% to 18.4%.

That saw yields in Rotorua fall across the board and they are now in the 5.5% to 7.0% range, meaning some investors may consider parts of the market in Rotorua are now overpriced.

Palmerston North recorded price rises of between 13.9% and 18.6%, while rents rose by between 5.6% and 11.4% pushing yields down to between 5.1% and 5.9%.

In the Wellington region prices were up strongly (4.5%-16.3%)  in all of the locations monitored except Vogeltown/Berhampore/Newtown, where they dropped by 5.0%.

Rents in the Wellington region put in an even stronger showing, rising by between 4,4% in Paraparaumu and 16.9% in Wainuiomata, which pushed yields mostly higher and several locations in Wellington still have gross yields above 5%.

In Christchurch there was strong price growth in all locations monitored while rental growth was more subdued and as a result yields declined and are now in the 4.4% to 6.4% range.

Dunedin experienced very strong price growth in the 12.4% to 28.1% range. And while rents also grew strongly with two of the three locations monitored recording double digit growth, yields were down sharply, dropping from 5.5% to 6.8% in the period from April to September last year, to 5.2% to 6.2% in the same period of this year.

That suggests investment bargains may be becoming short on the ground in Dunedin.

The following table shows the indicative yield trends in all 56 locations monitored ( more comprehensive table showing full quarterly going back to September 2014 is available here.

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Indicative gross rental yields for three bedroom houses in 56 selected areas with high rental activity during the previous six months. Based on REINZ lower quartile selling prices and median rents recorded by Tenancy Services' Bonds Centre in each area over the previous six months.

    Indicative gross residential rental yields for the six months ending:
Town/region Yield % Sept 2019 Yield % June 2019 Yield % Mar 2019 Yield % Dec 2018 Yield % Sept 2018 Yield % Sept 2017 Yield % Sept 2016 Yield % Sept 2015 Yield % Sept 2014
Whangarei:                  
Kamo/Tikipunga/Kensington 5.5 5.3 5.3 5.5 5.5 5.3 5.9 7.1

6.4

Rodney - Orewa/Whangaparaoa 4.2 4.2 4.2 4.1 3.9 4.0 3.9 4.3

4.8

North Shore:                

 

Beach Haven/Birkdale 4.2 4.1 3.8 3.8 3.9 4.0 3.7 3.9

4.6

Torbay 4.0 4.0 3.8 3.9 3.9 3.6 3.4 3.8

4.5

Waitakere:                

 

Glen Eden 4.3 4.3 4.0 4.1 4.1 3.9 3.7 4.1

5.1

Massey/Royal Heights 4.3 4.3 4.0 4.0 4.0 3.9 3.8 4.1

5.1

Henderson 4.6 4.4 4.1 4.2 4.1 4.1 3.8 4.1

5.0

Central Auckland:                

 

Avondale 4.3 4.2 3.9 3.9 4.1 3.6 3.7 3.9

4.5

Manukau:                

 

Highland Park 3.5 3.8 3.4 3.3 3.3 3.8 3.4 3.6

4.3

Papakura/Drury/Karaka 4.7 4.8 5.1 5.0 4.9 4.7 4.4 4.9

6.0

Franklin - Pukekohe/Tuakau 4.5 4.6 4.7 4.6 4.5 4.8 4.3 5.0

5.6

Hamilton:                

 

Deanwell/Melville/Fitzroy 5.0 5.0 4.9 4.9 5.1 4.8 5.1 6.2

6.9

Fairfield/Fairview Downs 4.9 4.7 4.4 4.4 4.8 4.5 4.8 6.0

7.0

Te Kowhai/St Andrews/Queenswood 4.6 4.5 4.6 4.7 4.7 4.6 4.6 5.3

5.8

Cambridge/Leamington 4.5 4.4 4.4 4.5 4.6 4.4 4.7 5.2

5.9

Te Awamutu 5.0 4.9 4.9 4.9 5.1 5.0 5.2 6.3

6.4

Tauranga:                

 

Tauranga Central/Greerton 4.5 4.8 5.5 5.1 4.9 5.1 4.3 5.6

5.9

Bethlehem/Otumoetai 4.3 4.2 3.7 4.0 4.2 4.1 4.2 4.8

5.4

Mt Maunganui 4.2 4.4 4.6 4.5 4.6 4.3 4.2 4.7

5.2

Pyes Pa/Welcome Bay 4.5 4.7 4.8 4.7 4.5 4.7 4.9 5.3

5.8

Kaimai/Te Puke 5.2 5.3 5.0 5.1 5.1 5.0 5.5 6.2

5.7

Whakatane 5.7 5.4 5.7 5.9 5.8 6.1 6.5 7.3

6.9

Roturua:                  
Holdens Bay/Owhata/Ngapuna 6.1 6.5 6.1 6.3 7.0 9.3 10.7 8.7 n.a.
Kuirau/Hillcrest/Glenholm 5.4 6.0 4.9 4.9 5.5 5.6 7.5 6.6 n.a.
Ngongotaha/Pleasant Heights/Koutu 5.5 6.0 6.1 6.5 6.7 8.5 7.2 8.2 n.a.
Hastings - Flaxmere 7.0 7.9 8.2 8.3 8.4 9.9 9.4 11.0

11.8

Napier - Taradale 4.5 4.6 5.0 5.1 4.9 4.4 5.1 5.5

6.1

Taranaki:                  
New Plymouth Central/Moturoa 5.5 4.7 5.3 5.1 4.6 5.4 5.1 5.5 n.a.
Waitara/Inglewood 7.7 6.7 7.6 7.4 6.6 6.0 7.7 8.0 n.a.
Whanganui 7.6 7.8 8.1 8.2 8.5 8.7 9.7 14.9 n.a.
Palmerston North:                  
Kelvin Grove/Roslyn 5.3 5.7 5.6 5.7 5.9 6.3 7.0 7.2 n.a.
Palmerston North Central 4.8 5.3 5.3 5.2 5.1 5.5 6.5 6.2 n.a.
Takaro/Cloverlea/Milson 5.5 5.6 5.6 5.7 5.8 6.2 6.7 7.3 n.a.
Kapiti Coast:                

 

Paraparaumu/Raumati 4.7 4.8 4.5 4.8 5.2 5.0 5.6 6.1

5.9

Waikanae/Otaki 4.4 4.7 4.5 4.4 4.5 4.7 5.8 6.8

5.4

Upper Hutt:                  
Heretaunga/Silverstream 5.1 5.1 4.9 5.0 4.9 5.4 5.3 6.1 n.a.
Totara Park/Maoribank/Te Marua 5.2 5.3 5.2 5.3 5.6 5.7 5.7 6.8 n.a.
Lower Hutt:                  
Epuni/Avalon 4.9 4.8 5.2 5.1 4.5 4.8 5.1 5.1 n.a.
Taita/Naenae 5.3 5.0 5.4 5.5 5.4 5.5 6.2 7.1 n.a.
Wainuiomata 5.3 5.3 5.5 5.5 5.3 5.7 7.0 7.7 n.a.
Wellington:                

 

Johnsonville/Newlands 4.7 4.7 4.9 5.1 5.0 5.0 4.8 5.6

6.2

Vogeltown/Berhampore/Newtown 5.0 5.0 4.6 4.4 4.3 4.5 4.6 5.5

5.6

Tasman:                

 

Motueka 4.0 4.2 4.3 4.4 4.3 5.0 4.7 5.3

5.5

Richmond/Wakefield/Brightwater 4.3 4.5 4.4 4.3 4.3 4.8 4.8 5.5

5.9

Nelson - Stoke/Nayland/Tahunanui 4.7 4.7 4.6 4.5 4.7 4.8 5.2 5.8

6.0

Blenheim 5.5 5.3 5.3 5.3 5.4 5.7 6.5 6.4

6.5

Christchurch:                

 

Hornby/Islington/Hei Hei 5.8 5.8 5.9 5.8 6.0 5.6 6.1 6.2

6.3

Riccarton 4.4 5.9 5.2 5.1 5.6 5.1 5.5 4.9

5.1

Woolston/Opawa 6.4 6.4 6.5 7.1 7.2 6.2 6.6 6.6

8.0

Ashburton 6.3 5.7 5.8 6.3 6.3 6.3 6.3 6.9

7.2

Timaru 5.8 6.0 6.1 6.1 5.8 6.0 6.1 6.2

6.3

Queenstown/Frankton/Arrowtown 4.0 4.2 4.0 4.1 4.3 4.4 4.5 5.0

5.3

Dunedin:                  
Kenmure/Mornington 5.2 5.3 5.1 5.5 5.7 5.8 6.3 6.6 n.a.
Mosgiel 5.2 5.3 5.2 5.3 5.5 5.4 5.7 6.1 n.a.
South Dunedin/St Kilda 6.2 6.5 6.9 6.4 6.8 8.6 8.1 8.2 n.a.
Invercargill 7.1 7.0 7.2 7.7 8.3 8.9 8.3 9.0

9.5

Source: Base data from REINZ / MBIE

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In Auckland, One and two bedroom properties outnumber three and four bedroom. There is the same number of 2 bed as there are 3 bed. Nationally is similar story but there are 2712 3 bed vs 2215 two bed as advertised on trademe. My gut is that two bed properties will continue to increase in popularity.

Talk to any seasoned resdiential investor, and they'll tell you two bedrooms perform way better than three bedrooms.

There's truth to the expression 'two's company, but three's a crowd.' Sad to say it, but I prefer professional or trade couples over a families; with two bedrooms more suited to them. Unfortunately kids are particularly damaging on the accommodation interior, just because they're kids. And fair wear and tear has such a vague meaning in the tenancy tribunal, where the adjudicators are stacked full of do gooders; where precedent is now set.

Successive governments and the bureacrasts they employ have created a situation where the state now has to deliver accommodate to low to middle income family now. I think its because they dont understand the meaning of accountability themselves; always trying to pass the parcel.

I like how you've applied the saying "truth to the expression 'two's company, but three's a crowd." GS
Yes, smaller properties cost less to buy and also have good rents and much lower management and maintenance costs. Higher NET yields and good for the back pocket.

Fair wear & tear wallpaper & spill glass of red wine on carpet & leave it
That was your “Professionals” a computer programmer & corporate payroll manager & 1 child
Still that’s nothing compared to having your rental used for P manufacture that many have experienced
I’m amazed people are still “investing” in housing at all
Surely by now people have woken up to the immense hassle of rentals as a investment
Then again maybe not

As a prospective FHB I usually preach for investors to invest in more productive things. But this doesn't bother me so much, because i'm not in competition with you! 2 bedroom houses are probably for more transient people, 3s more for young families looking to put down roots. If investors concentrate on owning and managing smaller properties for transient populations, it might free up more 3 beds for people like me and my classmates to buy. In the meantime, while we save, we rent 2 beds :) win win....?

An investor buy a property for $500,000 cash. Rents it out for $385 per week, so a 4% yield.

In 6 month's time the value of the property drops $50,000 but the rent stays the same so their yield has increased from 4% to 4.4%. Is this good for the investor?

No, (although if he has a long term horizon and his debt is under cointrol he may not be too worried) but it may be good news for anyone thinking of buying an investment property, including existing investors thinking of adding to their portfolios, because the price will be less and the yield higher.

An investor buys a property for $500,000 cash. Rents it out for $385 per week, so a 4% yield.

In 6 month's time the value of the property increases by $50,000 but the rent stays the same so their yield has decreased from 4% to 3.6%. Is this good for the investor?

GN would say (so not as to waste his time with silly questions):

"Yes, but it may be bad news for anyone thinking of buying an investment property, including existing investors thinking of adding to their portfolios, because the price will be more and the yield lower."

But this article isn't about decreasing yields, it's about increasing yields. And i'm providing a hypothetical (but still likely) scenario of yield increasing and in this case it's not "looking slightly more attractive".

Greg,
Doesn't it depend on the objectives and circumstances of the buyer?

1) an income oriented buyer may be primarily concerned about the net rental income, and less concerned about property prices - e.g retirees
2) a capital gain oriented buyer who is concerned about capital gains would be in a financially worse off position.

Exactly but out of that rent revenue must come all ancillary “expenses” so the yield is not actually 4% at all
Rental property in Auckland was the standard suburban accountant recommendation to clients for decades
They just never told us about all the work involved
Great for them because it added to their accountancy work & hence billable hours.
Wake up “property investors”l

This is what many miss. Size of yield is proportional to the risk involved, and there are many factors that define what is risk. Yield is also tied inversely to capital growth so for example as you show when capital growth falls and/or goes negative, then yields increase.

While housing can be not very elastic for the owner from a liquidity side, because it is needed as a roof over ones head whatever happens in life, occupiers can be forced into a high degree of elasticity ie if the present rent becomes unaffordable you can work longer hours to make up shortfall, downsize, move location, move in with friends or family, kids move back home, start a relationship (two to a bed), but put off having kids, taking in a boarder, more beds per room, and hot bunking, borrow money and beg, ie go to foodbanks.

Yes of course your wages could go up, but they don't go up fast enough to cover increased rent, which increased due to the demand and the fact that the wage increase was automatically capitalised into the extra rent.

The fact we have record low unemployment, yet increasing homelessness and beneficiaries, is telling me have stretched the housing elasticity to breaking point.

Unlikely that median rent would’ve stayed the same though

Cool, let's say you lose $20k in capital but rent goes up 5% ($20 per week). Recoup that capital loss in 14 years if rent increases 5% every year if house prices stagnate.

But a $20k, $50k, $100k reduction in house prices will only be a temporary thing.

Yes. The loss in capital value only counts if you sell when prices are down. And if you are in an urban centre, history tells us it’s just a matter of time until the unrealised capital loss becomes an unrealised capital gain as prices recover. Rent is more likely to be a compounding increase of 3%-5% every year as opposed to just a one-off 5% increase. It would take less than 14 years to account for $20K under this scenario I think. But I don’t look at rent income as adding to or subtracting from capital gain or loss.

On day one of a property investment loan interest likely cancels out rental income - in my experience profit comes form compounding rent inflation. I don’t sell property so unrealised capital gain stays unrealised.

14
up

Roll up roll up.. Get your investment property now.. the only game in town, your moneys no good in the bank... Plenty of desperate renters about and more coming.... So quickly get your investment property sorted now to beat the syndicates and businesses that will surely follow the money and invest in property.
House prices and rents must rise for the sake of the economy, so do your bit to keep the banks happy and take on that mortgage.

Every now and then a 'light-hearted' comment is posted that cuts through to the seriousness of the situation - although the vast majority of us don't realise just how serious, and your comment, above, is one of them! Thanks.

OWN THAT HOME

Yes, very little change for prospecting investors. From an investment point of view, I don't understand why more caution isn't being advised in more places. Well I do understand why but it's really not helpful or useful. Check out this video from Australia. From a boom/bubble, they've had quite a large downturn in the market in Sydney and Melbourne in particular, which NZ hasn't had yet. The professional "optimists" like Switzer in the vid are doing their best to talk up an upturn, helped by lowering interest rates, without even entertaining that it could be a dead cat bounce, or the figures are unreliable and it's not much of a bounce at all. Realists look past the auction reports and look at what's actually happening on the ground, like in this video. Caution advised, rather than being overly optimistic at any little incremental change: https://streamable.com/21kbq

If you well employed in a safe sector, makes it easier to get into the ladder. Yields will come more into view as cap gains slow/retrench.

Can someone come up with the buy now pay later scheme like Afterpay for buying (another) house?

"Buy now pay later" is conceptually the same as interest-only loans, which are really only set up for speculation. Have been wonderful tools in epic property bubbles in the English-speaking world. But ultimately, they're the manifestation of the central banks' broken money creation mechanism.

Isn't that what LVRs are all about?

A) Buying long term development projects off the plan.

1) Pay 10% upon signing contract
2) Pay the remainder in a few years time when / if the project is completed

Meanwhile, sufficient time to make capital gains / losses for capital gain oriented investors.

B) Types of low deposit sales (from Olly Newland)
i) Long term agreement for sale and purchase
ii) Rent to buy
iii) Wrap mortgage
iv) Lease with compulsory purchase
v) Lease with option to purchase
vi) Long term settlement with prior access.

"It is a very useful tool to get rid of some 'sticky'or pain-in-the-backside investment that you couldn't sell otherwise"

"Meanwhile, sufficient time to make capital gains / losses for capital gain oriented investors."

Sufficient time for the developer to go broke.

Well everything possible has been done by these dumb fools masquerading as a Government to force investors from the market ............. the consequence was always going to be increased rentals as the supply of rental stock was sold off ............

Personally don’t buy anything under 6% or very close to that, plus there has to be upside with it.
Wouldn’t consider paying $500k and getting $385 per week rent less rates, insurance and costs, is not a great investment.
Lowest yield we currently have is $530 per week and paid $471k for it but it was a 231m2 executive home in nice subdivision current GV $570k

dp

Bragging about your humility? Big Andy Samberg move, gotta respect that!

https://youtu.be/tIpbYyR0OOI

GGP I personally am very happy to hear The Mans rent vs purchase price numbers so he can share it. Investors discuss that kind of thing all the time so how is that "bragging". If you're getting uptight over someone else's journey and closing off I cant imagine that you will do extra well in life.

He edited out the part I was laughing about. I actually do appreciate his recent posts, including this one.

Fair enough

Sorry, what did I edit out??

Houseworks, as I have said before, this site is designed to help people make financial decisions!
I find people who are investors telling others their returns or non returns far more interesting than reading BS from the doom and gloom merchants who are not investors in anything.

If what you say is right then Auckland looks miserable for investment. Hard to get north of 5.5%
You don't think with term deposits so low now that a 5% yield is not acceptable?

5 per cent is great in Auckland I would say at the moment.
Personally we buy for yield and upside .
This site Interest.co is designed to help people
Make financial decisions rather than doom and gloom merchants on property.
My point is the property market is not Auckland solely

Personally we buy for yield and upside

Might pick your brains here. What's your rule of thumb for assessing "yield and upside"?

Don't know what the Man thinks, but my investor mate tolerates a lower yield on property that has more land, because there will usually be greater capital gain.
So in Auckland his bottom line yield for a property with some reasonable land area (greater than 600 square metres) is at least 4.5%, while his bottom line for a flat or townhouse is around 5.5-6%

I don’t just buy something because it is positively geared over 6%.
The property needs to be in a good area and have very few negatives for a 6% yield.
Our average yield on the portfolio averages nearly 10% on purchase prices and range from 6% to 15%.
Upside is the fact that you are buying under market value and can be improved when the time comes which means we will never buy and then overcapitalise.
We have bid on many at auctions and never bought as we know when to pull out.

So would you consider 5% in Auckland? Or your 6% rule applies everywhere?

Fritz, don’t know the Auckland market!
With interest rates so low, 5% would be fine if I was buy it well and future upside!
Everyone has differing things they look for in an investment but it depends how serious you are as an investor.

THE WAR ON LANDLORDS!1!!

"sdroldnal no raw eht"
Unfortunately the war is back to front where tenants are getting it in the neck too.

Wooow, higher rents! just what most people were looking forward to!