High rental yields are replacing capital gains as the Holy Grail for property investors, and new figures from CoreLogic show where to find them.
The housing market has turned, with house prices down 5% to 6% so far and forecast to drop up to 20% once adjusted for inflation. When prices finished their fall, they were expected to flatline for several years.
CoreLogic chief property economist Kelvin Davidson said that limited the potential for capital gains for the foreseeable future, and meant investors would switch focus to buying high-yield properties for the lowest risk.
Rental yield is the measure of rental income a property generates against its purchase price.
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But the national average yield was currently just 2.6%, and investors would want a higher yield to make sure the property was worthwhile, he said.
Analysis by the property research company drilled into property type and location to identify where yields above 4% could be found. It showed that three-bedroom houses in Gisborne and two-bedroom apartments in Newton/Grafton in Auckland had some of the best yields.
In Gisborne, the median price for a three-bedroom house was $601,150 and the median rent was $575. That returned a gross rental yield of 5%.
Two-bedroom apartments in Newton/Grafton had a median price of $598,550 and a median rent of $570, which also made for a 5% yield.
BARFOOT & THOMPSON/Stuff
Two-bedroom apartments in Newton/Grafton in Auckland have a 5% yield.
Three-bedroom houses in Whanganui, and two-bedroom apartments in Auckland central west and Wadestown/Thorndon in Wellington offered yields of 4.5%.
In Christchurch, three-bedroom houses in Addington and Woolston/Opawa had yields of 4.4% and 4.2% respectively, while two-bedroom flats in Linwood/Phillipstown and St Albans East/Edgeware offered 4.3% and 4.1%.
And in Dunedin, three-bedroom houses in Kenmure/Mornington and Glenleith/Roslyn/Belleknowles had yields of 4.1% and 4.0%.
In contrast, there were sub-2% yields in some expensive areas. An example was three-bedroom houses in Remuera, Westmere/Surrey Crescent, St Heliers/Glendowie, and Gray Lynn/Arch Hill in Auckland, all at 1.7%.
Alden Williams/Stuff
Three-bedroom houses in Gray Lynn in Auckland have sub-2% yields.
Davidson said higher yields tended to be found in areas with cheaper house prices, and there was always an element of risk involved which was worth considering.
The West Coast generally had the highest yields in the country, but rental property risks, such as long vacancies, were greater, so high yields would be essential, he said. Recent Real Estate Institute figures put the region’s yield at 5.2%.
“Strong rent increases have helped yields, but rents have been rising at around 6% to 7% annually, which is double the long-term pace of 3%,” Davidson said.
“Given tenants’ wages ultimately cap how much they can afford to pay, there’s a limit to how long such rapid rates of rental growth can last.”
But even if rent growth slowed back to 3%, rents were not likely to fall, and if house prices kept falling that would push up yields at a faster rate, he said.
While experts consider the current environment challenging for investors, due to tighter credit conditions and regulatory changes such as new interest deductibility rules, there were still investors in the market.
Buyer classification figures showed mortgaged investors’ share of purchases had fallen over the past year, but they retained a 23% to 24% share.
