After almost two years of improving yields on rental properties, they took a breather at the end of 2023

The fundamental attractiveness of residential property as an investment tended to flatten out at the end of last year, after 18 months of steady improvement.

Interest.co.nz tracks the theoretical rental yields that would be achieved on the three main types of rental properties (one bedroom units, two bedroom units and three bedroom houses), nationally and in all of the main urban districts around the country each quarter.

Using lower quarter selling price data for each type of property from the Real Estate Institute of NZ and matching that with median rent data  from bonds received by Tenancy Services each month, provides an indicative rental yield for each type of property in each district.

This allows us to track the relative attractiveness of the rental property market each quarter, using a standard measure based on actual market movements.

A rental yield measures a property's income earning potential relative to its purchase price, making it a fundamental indicator of the rental market.
But it is not a measure of individual cash flows, which are affected by such things as how much debt an investor takes on, movements in mortgage interest costs, vacancy rates and outgoings such as rates, insurance and maintenance.

Over the last couple of years most of the attention has been focused on the costs of owning rental property because they have been steadily increasing.

But what has often been missed is the fact that the fundamental attractiveness of residential investment property as an income producing asset has been steadily improving.

That's because property prices have been generally declining, while rents have been generally increasing.

In the first quarter (Q1) of 2022 the Real Estate Institute of New Zealand's national lower quartile selling price for three bedroom houses was $650,000, while the median rent for three bedroom houses in the same quarter was $589 a week, giving a gross yield of 4.7%.

A year later in Q1 2023, the national lower quartile price for three bedroom houses had dropped to $566,050 while the median rent for the same type of properties had increased to $620 a week, pushing the gross yield up to 5.7%.

It dropped back down to 5.6% in Q2 2023 and stayed there for the rest of year, suggesting a period of relative stability in the rental market, with prices and rents moving in tandem.

However 5.6% is not a particularly attractive gross return for investors looking for income, especially when they are facing significant increases in outgoings and uncertain prospects for capital gains.

However better returns are available on multi-unit properties such as home units.

The national yields on two bedroom units increased from 5.7% in Q1 2022 to 7.2% in Q3 2023, before dropping back to 6.8% in Q4 2023, while yields on one bedroom units rose from 6.4% in Q1 2022 to 10.4% in Q3 2023 , then dropped back to 8.7% in Q4 2023.

There are also major differences in yields depending on location.

For example, in Auckland, where property prices are extremely high relative to rents, the yields on three bedroom houses rose from a paltry 3.5% in Q1 2022 to a measly 4.4% in Q4 2023, so good luck to anyone trying to squeeze a decent income out of that. 

The table below shows the quarterly movements in indicative yields for the three main rental property types in all of the country's main urban districts, including each of the council wards within Auckland City.

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