Residential property investors who bought into the market in the first half of this year were likely to have achieved gross rental yields ranging from 4.2% to 12% depending on the area they purchased in.
Interest.co.nz has teamed up with the Real Estate Institute of NZ to produce the Residential Investment Property Yield Indicator, a new tool designed to help residential property investors or other people with an interest in the market, monitor how it is performing.
The indicator will track likely gross rental yields in 40 areas around the country where there is a high level of rental activity.
It's first edition, covering the first six months of this year (published in full below), showed significant variations in potential yields between locations.
In Auckland where property prices are highest, potential yields were mostly under 5.5% and below 5% in some places. The lowest yield in the Indicator was 4.2% in the Orewa/Whangaparaoa district in the north of the region.
The relatively low yields available in Auckland suggest investors that were buying into the market in the first half of the year were prepared to accept low initial returns in the expectation of capital gains in the future from rising property prices and eventually some rental growth.
Of the districts monitored in Wellington, potential yields were just under 6%, and above 6% on the Kapiti Coast.
In the three districts monitored in Christchurch, potential yields ranged form 5.7% in Riccarton to 7.9% in Woolston/Opawa.
The highest yields are in Flaxmere
The highest yield recorded by the Indicator was 12% at Flaxmere in Hawkes Bay.
A rental yield is a property's annual rental income expressed as a percentage of its purchase price.
It is often the first number investors look at when considering the purchase of a rental property, because it provides a quick comparison of the theoretical earning potential of different properties.
So it can be the starting point for purchase decisions, before other factors such as the cost of mortgage payments, rates and insurance, likely maintenance requirements and potential vacancy levels are taken into account.
When yields are low, it means that property prices are high compared to the rental income they are generating and when yields are high, the reverse is true.
The Yield Indicator is compiled using rents and selling prices for three bedroom houses in 39 of the 40 areas it monitors.
That's because three bedroom houses are still the most common form of rental property in this country.
The one exception is the Newton/Grafton area on the fringe of Auckland's CBD, where selling price and rent figures are for two bedroom apartments, the most common type of property rented in that area.
The selling prices used to calculate the yields are the REINZ's lower quartile selling prices for each area.
Lower quartile figures are used because investors tend to purchase properties towards the bottom of the market, while more expensive properties are more likely to be purchased by owner occupiers.
The rent figures used in the yield calculations are median rents as calculated by the Ministry of Business Innovation and Employment (MBIE) from the tenancy bonds it receives for the same type of properties and in the same areas as the REINZ selling price figures.
In both cases, the figures are for the same six month period.
Because the REINZ selling figures and the MBIE rent figures relate to the same types of properties in the same areas and over the same timeframe, the resulting yield figures should serve as a reasonable proxy for what is happening in the market.
Many areas were left out of the Indicator, either because they had low levels of rental activity, or because there was not a good match between the REINZ selling price figures and MBIE's rental figures, which would have made the yield figures unreliable.
However the Indicator is intended to provide a broad overview of trends in the market rather than a detailed analysis.
It will be updated quarterly.
The indicative yield figures for all 40 areas monitored are below:
|Newton/Grafton - based on 2 bedroom apartments sales price/rents||6.8|
|Te Kowhai/St Andrews/Queenswood||5.5|
|Pyes Pa/Welcome Bay||5.7|