Property prices rose strongly in the second half of 2020 and now rents have started to accelerate too – especially at the lower end of the market, where growth was about 9% last year. With lower value property also delivering the highest gross yield and the largest gains in property values last year, this segment is where overall returns were highest (16%). Of course, with more regulation set to bite in 2021, investors may not see such strong returns this year.
Not only are the prices being paid to buy houses rising pretty quickly at the moment, but rents have started to increase more rapidly too. On the latest data from MBIE/Tenancy Services (covering new bonds lodged), rents in the three months to December were 8.0% higher than a year earlier – or $480 per week, up from $445 a year ago. It’s quite striking that the growth isn’t just in the main centres either – as the first chart shows, areas such as Gisborne, Invercargill, and Whanganui have actually seen larger rises.
In addition to the regional breakdown, the bonds data is also split by segment/tier, to see whether it’s the top or bottom end (or middle) of the market that’s driving the upturn in rents. As the second chart shows, after a blip in the middle of 2020, it was the lower end of the market that had picked up the most by year-end, with lower quartile rents growing more than 9% annually (the lower quartile figure has 25% of rents below it, or 75% above). But the median and upper quartile rents had also accelerated too by the end of 2020.
In other words, much like the growth in property values in the second half of 2020, the recent rise in rents has been broad-based across geographical areas and different segments/tiers of the market. That said, it’s probably also worth a word of caution around the data. For example, the methodology behind these figures has recently changed and it appears that sample sizes might have dipped (which could have affected the results). In addition, the previous COVID-related freeze on rents may also have meant that some landlords have recently been trying to ‘catch up’.
That caveat aside, however, what about rental yields split by tier? For NZ as a whole, the bond data confirms the popular perception that cheaper property carries a higher yield – e.g. currently 4.2% at the lower end of the market, 3.7% for the median, and 3.4% at the upper end (see the third chart). Regardless of tier, all of these yields look favourable compared to a typical borrowing cost of about 2.5% at present (supporting anecdotal evidence that more rentals are delivering positive cashflow nowadays), and also much more attractive than less than 1% on a term deposit at the bank.
The continued appetite for investors to buy property – right across the value spectrum – is further explained by the returns that have been delivered recently. Indeed, as the fourth chart shows, even in Auckland where gross rental yields are lower (sub-3%), property delivered a double-digit return in the range of 13-14% last year, for each of the three tiers of the market. Across the country as a whole, the total return for lower end property was up at 16%.
Overall, the property market – and investors – are now firmly in the sights of the Reserve Bank and the Government, so future returns may be crimped by new measures such as tighter LVR rules and potentially an extension to the Brightline Test (not to mention the changes to tenancy laws). In that environment, it’s going to be fascinating to see if mortgaged investors’ share of purchases remains at recent highs of 27% (Q4 2020), or if/when it starts to fade back.