The areas with the strongest increases in rents over the past year have generally also seen large increases in property values – with both measures rising, it’s safe to say that underlying demand for property (whether it be rented or owner-occupied) is high. That will have driven strong investment returns for landlords in these areas, although the generally slowing pace of capital gains across the country means that the running profit (or gross yields) may start to come back into more focus again.
CoreLogic Senior Property Economist Kelvin Davidson writes:
For about 18 months now, average weekly rents across the country have been rising more quickly than average property values – that’s after an extended period (2013-17), where property values grew well in excess of rents (see the first chart). That period from 2013 to 2017 pushed down gross rental yields to low levels, but they are now of course starting to creep back up again. In turn, that will be starting to grab the attention of some property investors (existing and/or would-be).
Which parts of the country have had the strongest rental growth? And are they also the areas where property values are rising quickly too? If so, it’s safe to conclude that these are the areas with the strongest underlying level of demand/need for property. So let’s look at the actual data – the latest MBIE figures on rental bonds show that Kawerau and Kaikoura have been the leading areas for rental growth in recent months, with annual increases in the three months to July of 42% and 33% respectively. Interestingly, the earthquake-related effects on rents in Kaikoura (i.e. large spike in 2017 and then reversal in 2018) now seem to have passed through the system and they’re back on the ‘normal’ path – see the second chart.
Behind those two areas, there are 21 other parts of the country that have seen rents rise by at least 10% over the past year (a benchmark roughly double the national average rise of 5.6%). As the third chart shows, these are generally smaller, ‘regional’ parts of the country, rather than the main centres (although Wellington City does make this top-performers list) – and many of these regional areas have seen rising populations, alongside sometimes muted growth in new housing supply.
Those factors mean it’s no surprise to see that these areas have also had strong growth in average property values. As the fourth chart shows, only Waitomo and Whangarei have lagged behind to any great degree over the past year, with 16 of the 23 on this list actually recording double-digit growth. Again, Kawerau (29%) stands out, alongside Otorohanga (25%), Manawatu (18%), and Southland and Horowhenua (both 17%). For context, national average house values have only edged up by 2.3% over the past year, and Auckland’s have dropped by 2.3%.
So overall, generally the parts of the country with the strongest rental growth over the past year have also had large increases in property values, signaling a high level of demand/need for property. To investors in these areas, clearly this is a great combination – rising rents and solid capital gains (even if the gross yield part of the returns equation isn’t always that exciting) mean high returns. To be fair, the growth rate for property values around many parts of NZ has probably passed its peak and is now slowing, which diminishes the capital gains component of an investor’s return. But rental growth seems likely to continue to ‘tick over’ as it always has, which should help to slowly lift yields and support returns.