Renting rather than buying looks like a good proposition for many in the Auckland property market, at least in the next 12 months.

The yawning gap between Auckland property values and rents looks set to widen as landlords struggle to boost their rents in the wake of interest rate increases.

Auckland residential property prices have increased by more than 30 per cent across most of the city in the last three years; and in past decades landlords have been able to reflect at least some of that increase in their rents.

But city rents have remained virtually static in the last three years, reducing property investor yields and, for many people, tipping the balance towards renting rather than buying for many.

While there are exceptions where some landlords have been able to edge up their rents to recoup some additional financing costs, government figures suggest most landlords have had to wear significantly lower rental yields.

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Economists say the prospects of landlords being able to dramatically increase their rents are low, given the country's relatively low inflation and wage levels.

While there could be a danger of prospective property investors deserting the Auckland market, creating rental accommodation shortage, this is unlikely given the continued strong economic growth in New Zealand's major city.

Auckland is where the jobs are and where the majority of returning and new migrants end up living so, in the next six to 12 months at least, rents are not expected to balloon.

Several significant new housing developments, including two in South Auckland, will increase the number of lower-priced houses and units available in the rental market.

The third tranche of the Government's Housing Accords, announced in May, is likely to lead to more new homes being built within the Auckland urban area, increasing the supply of rental properties.

Mid-winter lull

QV says with relatively flat rents and rising values, coupled with interest rate increases, returns are lower so investors are becoming less active in parts of Auckland, particularly on the North Shore and in Central Auckland. QV valuers also report some increased out-of-town investor interest in markets such as Tauranga and Invercargill, where rental yields are better.

The Auckland situation seems unlikely to change dramatically in the foreseeable future, unless some unforeseen economic event disrupts robust economic growth.

Rental yields are lower in Auckland than in the rest of the country because the city's property prices are so high. According to the new Residential Investment Property Yield Indicator, a new initiative by the Real Estate Institute and financial news website Interest.co.nz to measure rental yields, most potential yields in the city were under 5.5 per cent during the first half of this year. The lowest yield in the survey was 4.2 per cent in the Orewa/Whangaparaoa district.

These compare with potential yields of 5.9 per cent in parts of Whangarei, 6.9 per cent in parts of Hamilton, 7.1 in Whakatane, 12 in Flaxmere (Hastings) and 9.3 in Invercargill.

The Ministry of Business Innovation and Employment publishes monthly statistics about bonds lodged on new rental agreements - and across most Auckland suburbs the rents being charged at the end of July were relatively flat, or even falling. The average value of tenancy bonds received by the ministry in June this year increased less than 3 per cent compared with June last year.

While some of this may be attributed to the usual mid-winter lull when most renters decide to remain in their existing accommodation, July figures suggest rents hardly moved between February and the end of July this year.

Economists say the relatively low yields in Auckland suggest investors who bought in the first half of the year were prepared to accept low initial returns in the expectation of capital gains from rising property prices and eventually some rental growth.

Landlords' dilemma

Property industry experts say the relatively low yields on Auckland's North Shore are no surprise, especially in coastal areas such as Torbay where price rises have been among the highest over the last few years. They say a four-bedroom stand-alone executive home in that area could have been bought for around $800,000 four years ago, whereas now it was worth closer to $1m to $1.2m. But a landlord charging $1200 a week in rent could price themselves out of the market by raising the rent.

Landlords have enjoyed significant appreciation in the value of their assets and those with long-established portfolios of property were willing to accept a lower rental yield in the knowledge that their asset was appreciating.

However, many landlords have higher borrowing costs and would be more seriously affected by higher interest rates reducing their cash flow from their property investments.

The problem for landlords in that situation is the ability of tenants to simply give notice and move if they find something cheaper to rent.

"There is an old saying in the industry that landlords should be looking at receiving an optimum rent rather than a maximum rent," says one property expert. "If you try to squeeze blood out of a stone then the stone will get up and walk," he says.

Unlike large European cities, Auckland lacked a cohesive, powerful landlord bloc that held enough sway in their marketplace to push rents up.

"Instead, here, a landlord is competing with a lot of other individual landlords for tenants, and aiming to attract the business of a lot of individual tenants, so they cannot individually greatly influence the level of rents."

Rates rises expected

While New Zealand has a strong home ownership culture, economists say in the situation where interest rates are rising and rental supply in most sectors and areas of Auckland appears to be strong, renting is probably a good option.

Former Reserve Bank economist Rodney Dickens says there is a strong disconnect between rents and property values which has played out during the last three years of rapid value increases in Auckland.

Although the Reserve Bank Governor Graham Wheeler has suggested interest rate increases are on hold for the next few months, most people in the property industry expect him to resume interest rate increases, probably early next year. In the meantime, the bank will be watching to see the impact of both its low-deposit mortgage restrictions imposed in October, and the four successive interest rate increases imposed in the last few months.

The number of houses bought and sold in Auckland has reduced, and the rate of value increase has also fallen, although some market players are predicting a small spring bounce-back to occur over the next few months. That is likely to result in further interest rate increases, even though the bank may gradually relax the high loans-to-value ratio restrictions on banks from early next year.

"The governor is prudent to impose a pause on further interest rate rises because it takes up to a year to see what impact those rises have on the market," he says.

Mr Dickens believes the country may be about half way through the interest rate cycle, with further rate rises likely next year. He says the numbers of new residential properties being built across parts of urban Auckland will help ensure some of the housing shortages in Auckland ease from next year.

He also sees the development of special housing areas and subsequent developments in suburbs such as Mangere and Weymouth helping to address shortages of affordable homes.

The president of the Auckland Property Investors Association, Andrew Bruce, says Auckland rents have been relatively static in the last six to 12 months. Many of his association's members believed there was room for rents to increase, especially with higher financing costs. But he says the property market was a complex one, with landlords in some sectors finding tenants more easily than others.

Key to success is research

He recently rented a property in Remuera which was in strong demand. "I could have rented that property three times over."

Some landlords were prepared to accept a lower yield in the hope of realising a strong capital gain, while newer investors were reliant on strong cash-flow from the rent to pay their financing costs. The key thing is when buying up front you must do your research and make sure you know what your net yield will be."

Bruce says some landlords were prepared to initially accept a lower yield and to gradually add value to their property by working on it themselves, and eventually receiving a capital gain.

"Successful people treat it as a business; they have a strategy and can add value to their investment property."

The Auckland rental market is complex and includes small apartments downtown, more expensive larger apartments, stand-alone suburban homes that have been divided into flats and luxury executive properties. Complicating the picture are leasehold units, where brave investors have scored significant bargains because most amateur property investors have been scared off by high ground rent increases.

The chief economist with the Institute of Economic Research, Shamubeel Euqub, is a strong proponent of renting rather than buying. He believes tenancy regulations in this country should be changed to provide tenants with longer-term tenure.

"Renting is not comparable to home ownership, because New Zealand has one of the least renter-friendly policy settings in the world," he says in a discussion paper on home affordability issues.

That would encourage people to rent with greater certainty of long tenure, and instead to invest in more productive sectors of the economy, and thus encourage general economic growth.

However, Bruce says longer-term certainty for renters might suit higher-end renters such as Euqub, but the majority of the rental market involved younger more mobile people who preferred the freedom to leave rental accommodation when they wanted to, at relatively short notice.