Martin Hawes: Houses yield poor returns

Housing is not a good investment currently. Photo / Herald on Sunday

Opinion

At present, houses make lousy investments. I am referring to the very low yield houses provide someone buying a rental property.

Yield - the cash that you can take from an investment compared to what you pay for it - is the arbiter of investment value. Yield determines how much wise investors would pay for their investments.

Yield is always calculated as if the purchaser did not borrow. This allows us to compare one investment with others (bonds, shares, bank deposits) without the distortion of different amounts of debt.

It is also done before any capital gain is taken into account - smart investors always make sure their investments stack up solely on the income that they provide and capital growth is regarded as an extra.

So, what is the yield from a typical house? To make this calculation, I have used the same method as I did in this column last year: I have taken the median house price of $350,000 (as provided by REINZ for January) and the median rental for a three-bedroom house of $325 a week (as provided by Department of Building and Housing).

A weekly rent of $325 translates to annual rent of $16,900. I then deduct the investor's costs for rates, insurance and maintenance ($3000) and also assume two weeks' vacancy. This would give a net annual rental income to the investor of $13,250 a year.

Now let's look at this as a percentage to give us the yield:

This yield is worse than when I did this last year using December 2008 figures. At that time, the yield for residential property was 3.95 per cent - rents are now a little higher but values are much higher.

This yield is far too low to give a decent investment return. To properly compensate an investor for the risk and work of owning investment property, the net yield needs to be around 7 per cent.

That means that either rents have to rise or values fall. I suspect both may happen to some degree as yields gradually come into line with what they should be but this will take some years.

It is true that these figures will not be a precise reflection of the market but if they are used consistently they give a fair indication of the direction of yields.

A few investors are speculating on price increases but any astute investor will know that there is little or no value in residential investing.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com