Rental growth is now outpacing property values. Interestingly, the highest rental yields can now be found outside the main centres. Simultaneously, the 10 lowest yielding suburbs are all located in Auckland. Factor in the dip in values in these expensive parts of Auckland, total returns over the past year haven’t been that flash. Meanwhile, the tax ring-fence on rental property losses (which kicked in on Monday), will also knock the returns for some investors, although we don’t anticipate that it will have a major market-wide impact.
CoreLogic Senior Property Economist Kelvin Davidson writes:
After a long period where average property values rose more quickly than rents, and hence gross rental yields fell, the situation has been reversing a little in recent months (see the first chart). Since the start of 2018, rents have been outpacing property values, and in the year to February 2019, the rise in national rents (5.6%) wasn’t far off double the increase in values (3.0%).
Of course, it needs to be noted that this hasn’t been due to a pick-up in rents (which are often anchored by tenants’ income growth, which lately has been subdued), rather the slowdown in property value growth. But either way, gross rental yields have begun to tick upwards again (see the second chart) and, although they’re still low (3.3%), that will start to look more appealing to potential new investors in residential property.
So how do things look around NZ and what’s happening to investors’ total returns* (i.e. rental yield + value changes)? Starting with the 10 suburbs/towns around the country with the highest gross rental yields**, shown in the third chart, we can see that there are some pretty attractive numbers on offer to landlords – such as a yield of 9.0% in Wairoa (Wairoa District) and 8.7% in Appleby (Invercargill City). Add in the growth that some of these areas have also seen in property values over the past year and the total returns look even more impressive – typically at least 20% for the areas in this list.
At the other end of the spectrum, the lowest yielding suburbs are unsurprisingly all in Auckland (see the fourth chart). Herne Bay, for example, only has a gross rental yield of 1.3% (weekly rent of $650 and property value of $2.59m) and when you also factor in its dip in median values of 2.3% over the past year (as well as the fact that gross yields don’t account for all the usual operating costs of being a landlord), total returns start to look a bit depressing. Orakei, Devonport, and Epsom also stand out for the wrong reasons on this measure - of course, given the huge capital gains that these suburbs have seen over the longer term, a negative total return over the most recent 12 months probably hasn’t been a huge concern for too many people.
Looking ahead, it wouldn’t be a surprise to see gross rental yields continue to rise in the coming months, as property values remain subdued and rents maintain their normal consistent pace of growth. Given the extra regulations and costs currently being imposed on landlords by the government, a rise in gross yields would clearly be a welcome trend for many investors. Of note is that the tax ring-fence for rental property losses came into force on Monday, so we’ll be watching closely over the next few months for any signs that investors are altering their behaviour, such as buying fewer properties and perhaps selling some of their existing holdings.