Four out of five sell under the hammer at Ray White City Apartments auction

So let me get this straight. You're lucky to scrape out a 1% p.a. capital appreciation in apartment buying, but in most cases you actually lose money?
Yes there might be a 6-7% yield available, but post mgt fees, service charges, maintenance, voids etc I think you would be lucky to get much above a 5%, and face the very real prospect of capital falls (as most of the original owners above did, and as is highly likely given the volume of apartments to be built in Ak in coming years).
It's the same with houses where you will struggle today in Ak to believe in anything more than a "possible" total return of 5% p.a. including capital gains over the next 5 years, which is lower than an equivalent period term deposit at a bank.
Why are kiwis so mathematically illiterate?

The rate of inflation is a fair measure of capital gains on apartments. History will show freehold apartments have exceeded inflation, but I like to be conservative and use 2.5% growth.

And heres some math for you. Take 80% lending on an apartment (say 300k value) that grows at 2.5% p.a for 5 years and is neutrally geared (rent covering interest and all BC's and rates). Whats the return on equity invested? Hint, its a lot more than 2.5%...

Look, if you believe in continuing capital growth then certainly the higher yield you can get on apartments means leverage can pump you to an OK return, theoretically.  Because you get R(cap growth) / D(deposit %) you have the beauty of "leveraged returns" on the way up, i.e. if you can convince a bank to lend you 80% on an investment property, a 2.5% growth rate would get you a 12.5% annual capital return on your equity. 

But my point above still holds, this relies on capital growth (as all leveraged plays do).  Historically you don't get that sort of growth in apartments, and looking forward it looks like a glut of new apartments are coming which will likely lead to capital values falling like they have in most of the cases in the article above.

Oh, and leverage works the other way in reverse as the equity eats all the losses.  So with your 80% loan, a 10% fall in the capital value results in a 50% loss to you!

For houses in Ak, it makes even less sense than apartments.  At curent interest rates and yields, you really need to believe in >5% annual capital growth per year to even beat a risk free term deposit.  Now Auckland has historically delivered around 5-6% growth over very long periods but with a lot of volatility.  We are coming off 2 years of >10% growth so what does that suggest if you believe in mean reversion?  And I don't believe the oft-touted drivel of a housing crisis; rents in Ak are growin 3.8% yoy.  Christchurch is 11% demonstrating what a real housing crisis leads to.

I also think we will see net immigration numbers fall from their current peak.  Our economy will slow markedly in coming quarters given the milk boom coming off and other countries will be more attractive to live and work as places like the UK are now booming and you can earn 3x as much as here.  Even in Aussie, you can buy a huge renovated Queenslander (5 beds) in Brisbane, with inground pool, in a top suburb, for under $1M.  That's a city bigger, wealthier and with stronger fundamentals than Auckland.  What does this amount buy you here in Ak?  A 3 bed do up on a postage stamp in a sub standard school zone?  We really do need to wake up to the silly purchase choices we are making.  High house prices don't make us wealthy as a nation - they just leave us with bigger mortgages and more susceptible to economic shocks.

I have an apartment that returns 9.9% gross, 7.5% net. I used equity sitting in other properties to buy it (effectively 100% leveraged). So its a lot like a carry trade. I borrowed at 5.99% locked in for 5 years to get a net return of 7.5%, with likely rental increases over that 5 year period. So leverage does not need to rely on capital gains to work. This is in wellington not auckland. Any capital gains are a bonus and make the returns that much better. In general I agree with you, but still money to be had for people willing to look a bit harder (and outside of auckland..).

SPIN - interesting headline

Based on the info contained in the body of the article it would be better cast as

"Original 2003 investors take serious haircut - suffering serious devaluation of their investments"