Rising yields suggest the residential property market could be returning to fundamentals, where income becomes more important than capital gain for investors

The residential property market could be at an important turning point for investors as rental yields start to rise.

A rental yield is a standardised way of comparing the potential gross income returns different properties could produce for investors.

It is the amount of rent a property could potentially generate in a year expressed as a percentage of its purchase price.

A higher yield suggests a property would provide a better rental return for an investor than one with a lower yield.

Until recently, yields have been trending lower as property prices rose faster than rents, reducing the rental returns available to investors.

But that appears to be changing, according to interest.co.nz’s Residential Investment Property Rental Yield Indicator.

The Indicator tracks the REINZ’s lower quartile selling prices for three bedroom houses in 56 locations around the country where there are high levels of rental activity, and matches them with the median rents on newly rented three bedroom houses in the same areas.

This allows it to track changes in the income earning potential of rental properties throughout the country.

The trend has been for yields to fall, as property prices have risen faster than rents, which has led to many investors chasing capital gains ahead of rental income.

But that now looks to have changed.

The latest Indicator shows that yields have risen in 27 of the locations monitored, fallen in 16 and were unchanged in 13, based on REINZ lower quartile selling prices and median rents on newly let properties in the six months to September (see table below).

That compares with 20 locations that showed rising yields, 27 that showed falls and nine that were unchanged based on prices and rents for the six months to June.

The trend was particularly pronounced in Auckland, where yields rose in six of the suburbs monitored, were unchanged in three but didn’t decline in any of them, and also in Christchurch.

But the indicative yields were also mostly rising or flat in places like the Waikato and Bay of Plenty which have been hot spots for residential property investors over the last couple of years.

That suggests a significant change in conditions for investors, and may mark a return to a market that is driven by fundamentals, where investors focus on long term income returns rather than capital gains.

In most cases the rising yields were driven by increases in rents but often also by falls in lower quartile selling prices.

However it is still early days and the indicative yields remain extremely low in most main centres.

In Auckland, they remain below 5% in all of the districts monitored and below 4% in half of them.

So the market may have some distance to travel before the returns are attractive enough to encourage a major jump in investor activity in the absence of capital gains.

The change also presents some challenges for investors who purchased rental properties several years ago.

They are likely to have seen a substantial increase in the capital value of their properties along with steadily increasing rental income.

With interest rates remaining at very low levels they would likely be in a very fortunate situation.

But if the market has turned, they will need to consider whether the money they have tied up in those investments is now working hard enough for them.

They will need to decide whether to hang on to their properties for growth in rental income and flat or possibly declining capital values, or cash up and take the the capital gains and reinvest the money elsewhere.

The outlook for interest rates is likely to be a major factor in whichever way they decide to go.

Indicative gross rental yields for three bedroom houses in 56 selected areas with high rental activity during the previous six months. Based on REINZ lower quartile selling prices and median rents recorded by Tenancy Services’ Bonds Centre in each area over the previous six months.
Town/region Yield % Sept 2017 Yield %
June 2017
Yield % March 2017 Yield % Dec 2016 Yield % Sept 2016 Yield % June 2016 Yield % March 2016 Yield %
Dec 2015
Yield %
Sept 2015
Yield %
June 2015
Yield %
March 2015
Yield %
Dec 2014
Yield % 
Sept 2014
Whangarei:                          
Kamo/Tikipunga/Kensington 5.3 5.5 5.4 5.4 5.9 6.1 6.0 5.6 7.1 6.5 6.9 7.6
6.4
                         
 
Rodney – Orewa/Whangaparaoa 4.0 4.0 4.0 3.8 3.9 4.1 4.1 4.1 4.3 4.5 4.5 4.6
4.8
                         
 
North Shore:                        
 
Beach Haven/Birkdale 4.0 3.8 3.7 3.7 3.7 3.7 3.9 3.8 3.9 4.0 4.3 4.3
4.6
Torbay 3.6 3.6 3.7 3.6 3.4 3.6 3.8 3.6 3.8 4.0 4.5 4.6
4.5
                         
 
Waitakere:                        
 
Glen Eden 3.9 3.9 4.0 3.8 3.7 3.9 4.0 4.0 4.1 4.3 4.6 4.9
5.1
Massey/Royal Heights 3.9 3.8 4.0 3.9 3.8 4.1 4.1 4.0 4.1 4.4 4.6 4.9
5.1
Henderson 4.1 4.0 3.9 3.8 3.8 3.8 4.1 4.1 4.1 4.4 4.7 4.9
5.0
                         
 
Central Auckland:                        
 
Avondale 3.6 3.5 3.6 3.6 3.7 3.6 3.7 3.7 3.9 4.1 4.2 4.4
4.5
                         
 
Manukau:                        
 
Highland Park 3.8 3.6 3.5 3.5 3.4 3.3 3.3 3.6 3.6 3.8 3.8 4.1
4.3
Papakura/Drury/Karaka 4.7 4.3 4.3 4.4 4.4 4.7 4.8 4.8 4.9 5.5 5.6 5.9
6.0
Franklin – Pukekohe/Tuakau 4.8 4.8 4.6 4.4 4.3 4.5 4.9 5.0 5.0 5.3 5.5 5.6
5.6
                         
 
Hamilton:                        
 
Deanwell/Melville/Fitzroy 4.8 4.8 4.8 5.0 5.1 5.4 5.3 5.5 6.2 6.8 6.9 6.9
6.9
Fairfield/Fairview Downs 4.5 4.5 4.9 4.8 4.8 5.1 5.4 5.7 6.0 6.8 6.7 6.2
7.0
Te Kowhai/St Andrews/Queenswood 4.6 4.5 4.4 4.3 4.6 4.7 4.7 4.9 5.3 5.4 5.4 5.6
5.8
                         
 
Cambridge/Leamington 4.4 4.4 4.6 4.6 4.7 4.8 5.2 5.3 5.2 5.5 5.5 5.6
5.9
                           
Te Awamutu 5.0 5.1 5.0 5.1 5.2 5.2 5.7 6.2 6.3 6.5 6.2 6.3
6.4
                         
 
Tauranga:                        
 
Tauranga Central/Greerton 5.1 4.7 4.6 4.4 4.3 3.7 5.2 5.2 5.6 6.0 6.1 5.9
5.9
Bethlehem/Otumoetai 4.1 4.0 4.1 3.7 4.2 4.2 4.6 4.8 4.8 4.5 4.8 5.3
5.4
Mt Maunganui 4.3 4.4 4.4 4.2 4.2 4.4 4.8 4.6 4.7 5.4 5.7 5.6
5.2
Pyes Pa/Welcome Bay 4.7 4.3 4.8 4.8 4.9 4.8 5.4 5.5 5.3 5.9 5.7 5.7
5.8
Kaimai/Te Puke 5.0 4.9 5.3 5.4 5.5 5.6 5.8 5.9 6.2 6.4 6.2 6.2
5.7
                           
Whakatane 6.1 6.0 6.1 5.8 6.5 6.6 6.4 7.1 7.3 6.7 6.3 6.7
6.9
                           
Roturua:                          
Holdens Bay/Owhata/Ngapuna 9.3 10.5 8.0 9.7 10.7 9.4 8.7 8.3 8.7 n.a. n.a. n.a. n.a.
Kuirau/Hillcrest/Glenholm 5.6 5.5 4.9 7.3 7.5 6.4 5.9 6.3 6.6 n.a. n.a. n.a. n.a.
Ngongataha/Pleasant Heights/Koutu 8.5 6.2 8.6 8.2 7.2 7.9 7.7 8.0 8.2 n.a. n.a. n.a. n.a.
                           
Hastings – Flaxmere 9.9 9.3 8.9 8.6 9.4 9.3 10.9 11.5 11.0 12.1 12.2 11.7
11.8
                         
 
Napier – Taradale 4.4 4.9 5.0 4.9 5.1 5.5 5.4 5.6 5.5 5.3 6.2 6.3
6.1
                           
Taranaki:                          
New Plymouth Central/Moturoa 5.4 4.9 4.7 5.3 5.1 5.4 5.8 5.4 5.5 n.a. n.a. n.a. n.a.
Waitara/Inglewood 6.0 7.2 8.1 7.0 7.7 7.7 8.8 8.9 8.0 n.a. n.a. n.a. n.a.
                           
Whanganui 8.7 8.6 9.1 9.7 9.7 10.3 9.6 10.0 14.9 n.a. n.a. n.a. n.a.
                           
Palmerston North:                          
Kelvin Grove/Roslyn 6.3 6.5 6.6 6.6 7.0 7.3 7.4 7.2 7.2 n.a. n.a. n.a. n.a.
Palmerston North Central 5.5 6.0 5.9 5.6 6.5 6.3 5.6 5.5 6.2 n.a. n.a. n.a. n.a.
Takaro/Cloverlea/Milson 6.2 6.2 6.1 6.3 6.7 6.8 7.2 7.1 7.3 n.a. n.a. n.a. n.a.
                         
 
Kapiti Coast:                        
 
Paraparaumu/Raumati 5.0 4.9 4.8 5.3 5.6 5.7 5.9 6.0 6.1 6.2 6.1 6.1
5.9
Waikanae/Otaki 4.7 4.7 5.2 5.5 5.8 5.8 5.9 6.5 6.8 6.6 6.7 5.5
5.4
                         
 
Upper Hutt:                          
Heretaunga/Silverstream 5.4 4.7 4.7 4.6 5.3 5.6 5.8 5.8 6.1 n.a. n.a. n.a. n.a.
Totara Park/Maoribank/Te Marua 5.7 5.8 5.8 5.2 5.7 6.2 6.3 6.2 6.8 n.a. n.a. n.a. n.a.
                           
Lower Hutt:                          
Epuni/Avalon 4.8 4.9 5.1 5.6 5.1 5.5 5.8 5.2 5.1 n.a. n.a. n.a. n.a.
Taita/Naenae 5.5 5.6 5.8 6.1 6.2 6.5 6.8 6.9 7.1 n.a. n.a. n.a. n.a.
Wainuiomata 5.7 5.9 5.9 6.3 7.0 7.2 7.7 7.7 7.7 n.a. n.a. n.a. n.a.
                           
Wellington:                        
 
Johnsonville/Newlands 5.0 5.0 4.9 4.8 4.8 5.2 5.5 5.4 5.6 5.8 5.6 5.5
6.2
Vogeltown/Berhampore/Newtown 4.5 4.5 4.2 4.1 4.6 4.9 5.4 5.2 5.5 5.1 5.5 5.2
5.6
                         
 
Tasman:                        
 
Motueka 5.0 4.4 4.0 4.0 4.7 5.3 5.2 5.4 5.3 5.3 5.5 5.6
5.5
Richmond/Wakefield/Brightwater 4.8 4.6 4.7 4.6 4.8 5.3 5.3 5.3 5.5 5.6 5.6 5.8
5.9
                           
Nelson – Stoke/Nayland/Tahunanui 4.8 5.0 5.1 5.1 5.2 5.3 5.5 5.7 5.8 5.9 5.7 5.7
6.0
                           
Blenheim 5.7 5.6 5.8 6.3 6.5 6.5 7.0 7.0 6.4 6.5 6.5 6.6
6.5
                         
 
Christchurch:                        
 
Hornby/Islington/Hei Hei 5.6 5.6 5.6 5.7 6.1 6.1 6.0 6.0 6.2 6.2 6.3 6.5
6.3
Riccarton 5.1 4.7 5.0 5.2 5.5 5.0 5.7 5.0 4.9 5.9 5.2 4.9
5.1
Woolston/Opawa 6.2 6.0 6.2 6.5 6.6 7.4 6.3 6.4 6.6 6.8 7.3 7.2
8.0
                           
Ashburton 6.3 7.0 8.3 8.4 6.3 6.1 6.2 7.0 6.9 7.0 6.8 6.7
7.2
                         
 
Timaru 6.0 5.7 6.0 5.9 6.1 6.4 6.5 6.4 6.2 6.6 6.8 6.7
6.3
                         
 
Queenstown/Frankton/Arrowtown 4.4 4.6 4.3 4.1 4.5 4.3 4.6 5.2 5.0 4.8 4.9 4.7
5.3
                         
 
Dunedin:                          
Kenmure/Mornington 5.8 6.3 7.5 6.5 6.3 6.7 7.9 7.1 6.6 n.a. n.a. n.a. n.a.
Mosgiel 5.4 5.4 5.5 5.7 5.7 5.7 6.4 6.4 6.1 n.a. n.a. n.a. n.a.
South Dunedin/St Kilda 8.6 8.0 7.9 7.5 8.1 7.4 7.2 8.0 8.2 n.a. n.a. n.a. n.a.
                           
Invercargill 8.9 8.3 8.3 7.9 8.3 8.4 8.7 9.1 9.0 6.7 9.0 9.2
9.5

Source : REINZ / MBIE

*Yield is a property’s annual rent expressed as a percentage of its purchase price. The indicative yield figures in this table are gross, and are calculated from the REINZ’s lower quartile selling price for three bedroom houses in each area during the previous 6 months, and the median rent for three bedroom houses calculated from new tenancy bonds received by the Ministry of Business Innovation and Employment for the same areas/period. This gives an indication of the gross rental yield that would have been achieved in each area if a three bedroom house was purchased at the lower quarter price and rented at the median rent for that area.

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