By Greg Ninness
The residential property market remains an attractive option for investors in spite of the disruption caused by the COVID-19 pandemic, according to Interest.co.nz's Residential Rental Yield Indicator.
The indicator tracks movement's in the Real Estate Institute of New Zealand's lower quartile selling price for three bedroom houses and rents for new tenancies in the same type of properties, in 56 locations around NZ where there's a high level of rental activity.
Lower quartile prices over the six months to the end of September were higher in 38 locations and lower in 18 when compared to the six months to the end of June.
Over the same period, median rents were higher in 30 locations, lower in seven and unchanged in 19.
The rise in both prices and rents will have been beneficial for existing landlords because it would have increased both their equity and rental income stream at a time when interest costs have been falling and vacancy levels remain low.
However the effect those movements have had on the attractiveness of buying further investment properties is more mixed.
If rents rise at a greater pace than prices, that increases gross rental yields, making rental properties more attractive to investors because the potential income stream is improved relative to the purchase price.
But if prices rise faster than rents, the opposite occurs and the yield will fall, making a rental property a less attractive proposition.
An indication of which way the market is moving for investors can be obtained by using the REINZ's lower quartile selling prices and the tenancy bond rental data from the Ministry of Business, Innovation & Employment to produce an indicative yield for all 56 locations monitored by interest.co.nz.
Of those 56 locations, indicative yields for the six months to September rose in 21, declined in 22 and were unchanged in 13 versus the six months to the end of June. Overall, that suggests movements in rents are broadly keeping pace with movements in prices, maintaining the attractiveness of residential property as an investment.
Across the 56 locations monitored, indicative yields ranged from 3.6% to 6.7%.
In Auckland, the country's biggest rental market by far, indicative yields ranged from 3.6% in Highland Park in the city's east, to 4.6% in Pukekohe on the its southern fringe.
In the Bay of Plenty they ranged from 4.1% to 6.7%, in the Wellington region from 4.3% to 5.3%, and in Christchurch they ranged from 4.9% to 5.8%.
Although the yield figures are gross (before allowing for costs such as interest payments, rates, insurance and vacancy), they suggest residential property remains a relatively attractive option for investors compared to other forms of investment such as bank deposits or shares, especially when interest rates are so low.
That suggests interest from investors in residential property is unlikely to wane as long as current market conditions persist.
One possible exception to that could be the Queenstown/Frankton/Lakes district which has the highest lower quartile price and highest median rent of any of the 56 locations monitored by interest.co.nz, but the lowest-equal yield of 3.6% (matched only by Highland Park in Auckland), which suggests prices in and around Queenstown may be over-valued relative to their potential rental streams, making it likely that investors could find more attractive opportunities by looking elsewhere.
The table below shows the trend in indicative rental yields in all 56 locations monitored by interest.co.nz, going back to September 2017. A more complete version of the table, 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.
|Yield % Sept
|Yield % Dec
|Yield % Sept
|Yield % June
|Yield % Dec
|Yield % Sept
|Yield % Sept
|Rodney - Orewa/Whangaparaoa||4.1||4.1||4.0||4.1||4.2||4.2||4.2||4.1||3.9||4.0|
|Franklin - Pukekohe/Tuakau||4.6||4.6||4.5||4.4||4.5||4.6||4.7||4.6||4.5||4.8|
|Te Kowhai/St Andrews/ Queenswood||4.2||4.3||4.2||4.3||4.6||4.5||4.6||4.7||4.7||4.6|
|Pyes Pa/Welcome Bay||4.6||4.5||4.5||4.7||4.5||4.7||4.8||4.7||4.5||4.7|
|Hastings - Flaxmere||6.0||5.9||6.1||6.3||7.0||7.9||8.2||8.3||8.4||9.9|
|Napier - Taradale||4.5||4.3||4.3||4.7||4.5||4.6||5.0||5.1||4.9||4.4|
|New Plymouth Central/Moturoa||4.6||5.0||4.6||5.4||5.5||4.7||5.3||5.1||4.6||5.4|
|Palmerston North Central||4.7||4.4||4.9||4.7||4.8||5.3||5.3||5.2||5.1||5.5|
|Totara Park/Maoribank/Te Marua||4.6||5.0||5.3||5.0||5.2||5.3||5.2||5.3||5.6||5.7|
|Nelson - Stoke/Nayland/Tahunanui||4.5||4,6||4.5||4.7||4.7||4.7||4.6||4.5||4.7||4.8|
|South Dunedin/St Kilda||6.1||5.5||5.4||5.7||6.2||6.5||6.9||6.4||6.8||8.6|
Source: Base data from REINZ / MBIE
*Yield is a property's annual rent expressed as a percentage of its purchase price. The indicative yield figures in this table are gross, and are calculated from the REINZ's lower quartile selling price for three bedroom houses in each area during the previous 6 months, and the median rent for three bedroom houses calculated from new tenancy bonds received by the Ministry of Business Innovation and Employment for the same areas/period. This gives an indication of the gross rental yield that would have been achieved in each area if a three bedroom house was purchased at the lower quarter price and rented at the median rent for that type of property in that area.
*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.