House prices are continuing to increase at a greater pace than rents, decreasing the potential income returns from residential property and reducing its potential attractiveness to investors, according to interest.co.nz's latest Indicative Rental Yield figures.
The figures monitor the REINZ's lower quartile selling prices for three bedroom houses in 56 locations around the country where there is substantial rental activity and match them with the median rent for three bedroom houses in the same locations.
Those figures are used to provide an indicative gross rental yield figure in each location which is updated quarterly, enabling the relative attractiveness of rental properties in those locations to be compared on an apples to apples basis and tracked over time.
Of the 56 locations monitored, the yields declined in 39 over the six months to the end of September this year, compared to the previous six months.
That means prices increased at a greater pace than rents in those locations, reducing the potential rental returns on offer.
The yields increased in 11 locations and were unchanged in six.
Some of the changes were spectacular.
In Auckland's Avondale the lower quartile price for three bedroom houses increased to $1,050,000 over the six months from April to September this year from $912,750 in the six months from October 2020 to March 2021. That's an increase of $137,250, or 15%, in six months.
Over the same period the median rent for three bedroom houses in Avondale decreased from $600 a week to $560 a week.
The combination of those factors dragged the indicative gross rental yield for Avondale down from 3.4% to 2.8%, which was the lowest yield in any of the locations monitored by interest.co.nz.
While the changes in yields weren't as spectacular in most other locations, the trend generally has been for yields to decline.
The area with the highest yield was Ashburton at 5.9%.
Of the 56 locations monitored, only eight had yields of 5% or more in the six months to October this year, compared to 14 with yields of 5% or more in the six months to March this year.
You can view the full rental yield figures for all 56 locations monitored by interest.co.nz here.
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80 Comments
House prices climbing faster than rents only makes sense - as we have a shortage of houses to buy - not a shortage to occupy.. this stage of the market is purely speculative
A shortage of houses to buy is one of the major reasons; financial markets flush with cash to lend is the other reason.
Banks jacking up the nominal purchasing power of competing buyers has led to a sharp increase in bid prices throughout the country.
E.g. two years ago, I was pre-approved to borrow $550k with a 20% deposit. The same bank offered me $750k on a slightly-higher pay rate in July 2021.
In July 21 interest rates were much lower than 2 years ago - so when capitalised the monthly repayment affords a higher loan level.. but in the last 8-12 weeks the interest rates drops have reversed entirely - so what’s the reason now?
Inertia. The housing market is a big beast and it takes a while for these changes to flow through.
Spot on
Potential for intensification may also explain it. Developers appear to be paying up for sections that can be subdivided / intensified.
Yes, I have mentioned this many times. It's a key factor keeping prices as buoyant as they are.
Oh no
Anyway
"Yield"? FUD talk.
Capital gains is where it's at. Should be able to squeeze out another 20-30% by the end of summer I reckon. Then Adrian will drop rates in Feb, allowing another slow leg upwards.
Keep dreaming.
I dunno if I was even being sarcastic or not. It’s all been so absurd.
Buying a rental property for the rental return... hah that's a good one.
Exactly, for most it's never been about the return, only about the gains
This is the way
This is the way.
This is the way.
Does a wanderer have 'a way'?
Yet our tax law lets the gains be tax free because the intension of the investment is supposed to be for the income.
Rental properties are unattractive because of low rental yields... Also on your 40% deposit on your Avondale home you made 40% capital gain in 6 months.
Nice if you are leaving town but otherwise you are just a dinghy on the rising tide
Unless you are a speculator who can pocket the tax-free gains and reinvest the principal in an "up-and-coming" location elsewhere in the country.
The rising tide of runaway property prices in Auckland and Wellington has lifted many a boat in the regions.
The idea is to have two dinghys. That way, in time, one can be turned back into liquid once the tide comes in.
"making residential investment property a less attractive option"
That's what labour promised and has delivered it, the difference is they said we make it available for everyone. But they have changed the strategy after coming in power and found it can also be done by doubling the price of houses.
Ash(ley)burton?
It's going to make it harder by the day to explain to the IRD why you bought the property in the first place.
Oh. And for those that think "I've just got to hold on for 10 years, then I don't have to pay any tax!" Wrong.
The Bright Line Test does not negate the possibility of paying Income Tax. It just clarifies it under 10 years (or whenever the property became liable for the BLT). Income Tax assessment is time-limitless in the IRD's eyes.
Provided they actually go after people and enforce it. I recall an article on here some months back (maybe last year) suggesting that doesn't seem to be the case
Here's the wonderful thing about the IRD - and any tax authority. They have all the time in the World.....
7 years Statutory Limitation? No such thing! They only have to find ONE little anomaly- in anything to do with your taxation affairs - and they can open up ALL of your affairs, going back to the cradle. Those who may think, "I got away with avoiding the BLT," might want to watch their IRD statements very carefully from now on.
(NB: Let's recall what brought Al Capone down!)
When the govt increased the BLT to 5 years Stuart Nash, to justify the increase, categorically stated in the house that those who held resi property longer than 5 years were considered investors. Not speculators. I very much doubt the IRD will be chasing any long term owners for tax
True. I am not sure if/how statutory limitations apply in what particular case, but a small business owner friend of mine got caught in the IRD net for a small discrepancy, a couple of years ago. They wanted to check and demanded documentation going back 12 years! They made his life a real hell for a while. When you get their attention for whatever reason, it is no joke.
4 year time bar on IRD increasing your tax from end of period in which return was filed. However, IRD can ignore time bar if return that was filed omitted income of a particular type or from a particular source or was fraudulent (https://legislation.govt.nz/act/public/1994/0166/latest/DLM354691.html).
Always include details of a property sale in accounts attached to your return even if you don't return the sale proceeds as income, therefore you will get the benefit of 4 year time bar (assuming you are not fraudulent).
Tertiary syphillis got Al. Tax only got him incarcerated.
They don't 'enforce' tax laws anymore. Their focus is on helping their 'customers' who don't comply with their obligations to 'get it right from the start'. You see people want to pay the right amount of tax, sometimes they just don't know how to. That's why they gutted their investigation department a few years ago despite IRD getting $6 in tax paid for every $1 they invest into investigations.
Their investigations team is a joke - popular among burnt out Wellington hospo workers looking for a change out of their physically-demanding jobs.
Last year, IRD sought some savings in ending the lease on one of their satellite office spaces that houses this team. These essential workers were provided double-stacked spaces when much of the country was practicing safe distancing.
This year I have overheard two people who bought and sold properties who said they plan to evade the taxman. Bet it's quite widespread
HM
I wouldn't believe everything that you hear . . . talk is one thing.
As changes in property titles and owners details are recorded by Land Information New Zealand they can be very easy searched by IRD in combination with their own databases. Properties owned for periods less than the BL period will raise red flags for a look at.
Also, from my experience in buying and selling properties, lawyers involved the conveyance of titles protect their own self-interests and will not knowingly put themselves personally on the line for a client to break the law including avoiding tax liability. The recent anti-ML legislation is but one example of accountability and penalty liability on lawyers.
No doubt some will get away with it but IRD are mercifulness in applying hefty compounding penalty taxes largely at their discretion and hounding you for the rest of your life. Those who have fallen foul of IRD regret it - ask that guy Henderson, they will pursue you for every after.
I suggest that those that you hear talk of such things are either full of BS or very naive.
They seemed serious, and yes they seemed naive...in one of the conversations the other person was trying to set them straight
HM
Agreed
Everything today is electronic which means IRD is considerably so much more efficient in detecting avoidance. Gone are the inefficient days of IRD trolling through paper based records.
I know of an old-school investor who had one of his properties strongly cash flow positive and never declared anything relating to the property. All was fine until a few years or so back the tenant of sometime qualified for WINZ benefit. The landlord was tripped up with seemingly data matching between WINZ and IRD, triggered a red flag, and went for a skate big time.
As to trying to avoid the BL - IRD don’t need to data match with other organisations. Rather they just need to look at your recent returns. Try to avoid the BL tax and highly likely to get the question “We note that you have been making returns for property x for the past three years; why not this year?”
A good accountant would not allow this type of avoidance, if you don’t have a good accountant you are probably missing out on a lot of benefits as well, it’s all swings and roundabouts with grazed knees when you fall off.
Let's not loose sight of the fact that capital gain has trumped income for some time and been the driving force. Good for legacy investors, but impossible for new investors unless you have lots of the dreaded two words ....real equity.
With the reserve bank restricting low deposit lending for new home buyers and the new tax laws and higher interest rates causing the low-yield rental properties to become large negative cashflow investments.
We should see a perfect storm of more ex-rental properties come on the market at the time when first home buyers cannot get approval, watch the market stagnate and drop, this should help the first home buyers.
Privately owned rental properties are likely to decrease significantly over the next couple of years.
Rents are likely to increase at a much faster rate due to lack of supply, low yields, higher taxes from interest deductibility changes, increased costs from government legislation such as healthy homes & protecting tenants from be evicted.
Increased support from MSD will be provided to beneficiaries to pay increased rents as it is cheaper than putting them in motels at $1200 per week.
In addition investors need to factor in the risk of further government intervention such as rent caps etc.
There is little the government can do to rectify rental affordability as housing prices will stay at unaffordable levels & this is compounded by rental supply which will continues to diminish.
The changes to the laws & interest rates affecting housing & rental properties are an absolute shambles.
The situation for renters is likely to get a lot worse over the next 2 years as a result of the government’s changes.
The irony is that Labour has made landlords significantly richer over the last 4 years & renters much worse off.
Who would have thought that would happen?
Who would have thought that would happen?
The chief ponzi officer probably had a pretty good idea.
It hasn’t been great for all landlords.... ask the twelve hundred empty Auckland apartment owners who will have to contend with a closed Chinese border during all of 2022.
Ask those that own empty shops..... there a few in Parnell I see. And small towns a good deal more!
And how many businesses have been getting rent relief..... quite a few! Do they have the capital to trade there way out of this?
And ask those mum & pop residential landlords how the cashflow is going to stack up during the next 36 months?
We are all in denial phase still....
>Who would have thought that would happen?
I didn't think it would happen. I was certain that Ardern would introduce a CGT on property investments.
Investors do not care about the debt. Even if they keep unrented, they will make millions in profit because some sheeple kiwi will come and offer them ridiculous amount of money to buy their house.
This is not going to change anything until we change our attitude.
I owe you + you owe me + magic banking laws = Money out of thin air
My mum still lives in Avondale. She has been offered $1.8M if she sells with her neighbour. Her house is on a corner so entry from 2 roads is likely. Pricing there is mad at present.
Avondale, what a beautiful suburb to live in
that ......SPIDER!!!
That...crackhead...
1.8 per, conditional at both being exercised isn't mad at all. The developer or land banker had worked his sum. Not hard to guess what they're probably up to.
So there it is again, something I have mentioned a lot, and people underappreciate how often this is occurring and how significant it is in pushing up house prices.
I wouldn't worry too much about the transitory phase of the rental market at the moment. As more mom and pop investors exit the market and providers concentrates, the yield lever will be tilted.
Renters, enjoy while it lasts.
Enjoy what? Rent akin to Melbourne or Sydney? HA.
Like Tardis's those ex rentals will vanish into thin air eh?
They won't vanish into thin air. But they will vanish from the pool of available rental properties.
My working theory is that we will start to see the rental market in many places move towards larger providers who specialise in multi-tenant rentals. The traditional small-scale Mum & Dad landlords will be progressively replaced with large scale residential rental operators that manage their own portfolios.
From the rental market, yes. Existing houses won't be appealing thanks to the interest deductability to landlords so they will disappear into the OO market. Or get bowled and redeveloped which takes time.
It's going to get better for renters soon with almost no immigration and all this supply coming online.
I have also heard that quite a few of my son's acquaintances who work in retail / hospo have returned to their parents' homes, with lost jobs or reduced hours - taking further pressure off rental demand.
I disagree about the no immigration, I know of one Kiwi who is just waiting to be able to get back into the country when able, that will be a rental required. As for sons and daughters moving back in with parents, this is just going to be pent up demand for the future.
Although I think the Ardern Government has done a marvellous job managing the Covid response, as a property asset- rich (but cash-poor) babyboomer I sometimes, against my equalitarian nature, wish that National had stayed in power long enough to introduce a bicameral parliamentary system which would include a House of Lords; this of course was always JK's unspoken intention.
In this counterfactual scenario, I sometimes dream that as a member of the landed gentry, I could have joined the National Party, especially as they are now desperately scouring the length of the land for anybody even half suitable, and become a member of the new House of Lords; it does have a certain attraction and I can picture myself rolling up to the Beehive in a parliamentary Beamer in a pin-striped suit.
This is how the class system must have evolved...the landed gentry, of which I am now one, and the hoi-polloi which obviously includes the unpropertied. It gives me a frisson of excitement everytime I have this thought even though my head tells me this is wrong, but I suppose this is how political power affects one.
streetwise,
Well, Key brought back Knighthoods, so that he would get one, so why not an NZ House of lords? Once a Lord, you can pull anybody's ponytail and if they complain, off to the Tower.
The yields now are so small because the market value of the property has far outrun rental growth. The multi-tenant properties I bought in Christchurch in the mid-2010's yielded at least 9%. Meaning they were producing good net cash-flow after all expenses and did not depend on capital gain to work as an investment. They still are generating a good return at a rate of 14% or so on original cost, but now the yield to sell, ie what a new owner will get is 6% or slightly less.
Needless to say there is no point selling them, yet.
Why would anybody sell the goose that lays such golden eggs?
I have multi-tenant properties in Dunedin that were purchased on similar yields. I keep a close eye on the market and have noticed that very few of these properties have come onto the market over the last three years. If you were lucky or prudent to invest in such properties prior to 2015 then it is genuinely hard to imagine where else you would you see such fantastic ongoing income from the initial investment.
SO HOUSE PRICE ARE STILL RISING but still no urgency from Orr and Robertson.
A rental in Goodwood Height which was rented for $650.00, now was re rented for $875.00 and are saying that 5% inflation is high (Removed rent from inflation to suit reserve bank governments narrative).
I'm an old-school property investor who buys properties specifically to increase cashflow & yield.
This has obviously become a whole lot harder in recent years. But I have faith that - over the long run - yields will revert to their long term averages.
Rising interest rates will likely play a major role in hastening this reversion.
Is this a paraphrase? The current return is immaterial. I can weather the next 5 years, but at 10years it’s looking golden and in 15 it is the golden goose? I’ve played with similar numbers and various counterfactuals and can see it being a good investment with a 10+ yr horizon.
it’s the beauty of excel. Multiple variables, run a sensitivity analysis….
The sooner 'investing' in residential property investment, in the form it exists in NZ, ceases to be a thing, the better. It has done nothing other than turn a large portion of society into livestock for the 'people farming' rentier class.
Investing in residential leasehold property should be done through co-operatives etc where anyone can invest money in property, even tenants. Most residential leased property should be permanently so. Having few individual landlords just using people to their best gain, will rid the country of transient people moving from one house sold out from under them to the next, eventuating in disengaged people with no stake in society, and contributing the consequential breakdown of that society.
Property investment imho, has been one of the major destroyers of our society, simply by decades of denying people security of tenure and somewhere to call home.
Well said. The foundation of the underclass and inequality is people having the security of shelter sold out from under them. Previous comments about surving negative yield just to make capital gains really underlines why a land tax is needed to force a constructive conversation between debt, income and tax.
I think I would make rental income not taxable. This would have two advantages:
(1) It would introduce parity, with respect to property ownership, between home owners and landlords; and
(2) It would open the door to other forms of property tax such as land tax. This latter would be a better way of taxing property since it would encourage efficiency in the use of land.
Why should there be tax parity with respect to property ownership between landlords and home owners? One is making an income from the property they own and the other is not.
Every property has a monetary "rental" value, which is the rent it might have obtained had it been rented out, so the rent that a homeowner saves by living in a property himself should be treated as income and taxed. However it is not so taxed, which is unfair on landlords, who are being taxed on those values, which they receive in the form of rent. Taxing rental incomes also means that in order to achieve an after tax income from his property, a landlord must charge a higher rent than would otherwise be the case. Thus tenants are also disadvantaged as compared with homeowners.
The Opportunities Party recognizes this, but their policy is to tax the homeowner's equity, which has the effect of providing him with a deduction for interest. However, now that interest is now deemed non deductible this seems unnecessary, and taxing the full rental value seems appropriate.
It's a godammed HOME!!!! Or at least that is what it should be. Commoditizing housing has got to be one of the more egregious things we ever allowed to happen
The accommodation that a house provides could be considered a commodity of sorts, I suppose, and why should one not pay for that. However, the house itself is not a commodity, but an asset. The return on that asset is of course the free accommodation that an owner receives.
But, of course, all we are doing here is arguing over terminology. You call it a home, I call it an investment; but the physical reality is the same either way.
Who said it shouldn't be paid for, not me. But I stand by what I said, commoditizing housing is truly horrid. People have to have homes, they can't this week say "Oh look, the rent/mortgage is on special at number 17 this week, let's move there this week", so essentially, renters, especially, are at the mercy of the whims of landlords.
I will rejoice the day when the sort of investing in rental accommodation in this country is kicked to the kerb, for something more sustainable and inclusive.
No, home and investment are poles apart.
Well, I guess you are entitled to your point of view. However, I stand by my original contention, ie that rental income should not be taxable, in spite of your dubious efforts to sidetrack the argument towards some irrelevant debate about whether properties are "homes" or "investments". Actually, most of the time they are probably both.
Both if the person investing in it is the person living in it.
Non taxable income for landlords along with no capital gains tax, you have absolutely got to be joking, though I guess it's one way to ensure that house prices go even further into the stratosphere as landlords compete with each other for non taxable income, as they strive to see that housing never becomes affordable as if people can afford to own their own homes, there goes your non taxed income.
Nope, it all needs tearing down and starting over
"Both if the person investing in it is the person living in it."
Finally! We are agreed that owner occupied houses are an investment. I knew you'd see sense eventually.
Oh well, that is a fizzer of a response, I am not exactly sure how you would have thought anyone would think otherwise about that.
Providing government subsidies to housing is the kicker..... look where subsidising industries landed us last time! We nearly went broke ala 84.... here we go again it seems.
What motive could someone have to pay $2.4 million for a small 70s two-bed on a small section in Sunnynook surounded by 50s houses built or owned by the government? Where's the sense, where's the logic?
An unmistakable example of the detachment of "price" versus "value"?
Is the price paid only a bet on a "greater fool" arriving (with the same idea)?
Or, does someone know that a banking crisis is coming........resulting in all mortgages being forgiven.........money becoming worthless etc? Spill, please.
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