New Colliers report shows capital gains from residential property declining and rental income returns going nowhere

New Colliers report shows capital gains from residential property declining and rental income returns going nowhere

There was a sharp decline in the capital returns from residential property in the fourth quarter of last year while income returns remained largely flat, according to Colliers International's Total Residential Returns report.

The report tracks the quarterly changes in the REINZ's median residential selling price for Auckland and the whole of New Zealand, and also the changes in median rents recorded by the Ministry of Business Innovation and Employment, and calculates the net income return, capital return and total (income plus capital) return that would be achieved if a median priced residential property was rented at the median rent (less a 25% allowance for landlord's expenses such as rates, maintenance and insurance).

This shows that in the fourth quarter of last year the total annual return (from net rental income and capital gain) that a median-priced property would have achieved was 6.3%, well down from the 15.2% a year in the third quarter of last year.

The decline was entirely due to a drop in the median selling price, which fell from $470,000 in the third quarter of last year to $460,000 in the fourth quarter, reducing the annual capital return from 11.9% to 2.9%.

The report also shows that rental returns remained remarkably flat last year, staying in the 3.3%-3.4% range from the fourth quarter of 2014 onwards (see the tables below which track the income, capital and total returns from 1993 to 2015).

A similar but less dramatic trend is also evident in the Auckland figures, with the total annual return declining from an 25.4% in the third quarter of last year to 17.5% in the fourth quarter, although that remained well up on the 13.1% achieved in the fourth quarter of 2014.

That was caused by an easing in Auckland's median price growth, with the median rising from $750,000 in the third quarter of last year to $760,000 in the fourth quarter, compared to rises of more than $45,000 in the second quarter and $34,500 in the first quarter  of last year.

That slowdown in price growth saw the annual capital return decline from 22.7% in the third quarter to 14.9% in the second quarter.

The net rental income return for Auckland over the same period declined from 2.9% in the fourth quarter of 2014 to 2.6% in the fourth quarter of last year, unchanged from the third quarter.

The easing in capital returns corresponds with a slowdown in the residential property market that occurred in the fourth quarter of last year due to new tax rules for residential investment properties sold within two years of purchase, the introduction of regulations that require overseas property investors to have a New Zealand bank account and IRD number and higher (30%) deposit requirements for residential investment properties in Auckland.

While total returns of 6.3% nationally (before finance costs and tax) and 17.5% in Auckland are still significantly better than returns being offered by other investments classes such as bank term deposits, much will depend on how the property market preforms as it heads into 2016.

If the price trends that were evident in the fourth quarter of last year continue, the double digit capital returns that have been achieved in Auckland will soon become a thing of the past, and investors will become more reliant on rental yields to make an investment stack up.

However it is probably still too early to pick a trend in prices.

Overall demand for residential properties remains strong, particularly in Auckland and rents are continuing to rise.

Those two factors and ongoing low mortgage interest rates would be likely to act as a hand brake on any easing in prices that does occur this year.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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