Rental property investment can be difficult with such high interest rates. Photo / Doug Sherring
Rental property investment can be difficult with such high interest rates. Photo / Doug Sherring
New Zealand has 2,056,578 dwellings, Census 2023 showed.
663,700 of those places are rented, Stats NZ quarterly figures show.
Those places are home to around 1.3 million tenants.
But high interest rates at 7% and lower rental yields of 4% mean investment is harder.
The crushing negative gap between what landlords are earning in rent and what they are paying in mortgages is the largest in about 15 years, an economist says.
Kelvin Davidson, senior property economist for data business CoreLogic NZ, said there was roughly a 4 percentage point gap between those href="https://www.nzherald.co.nz/topic/rental-property/" target="_blank">rental yields and average two-year standard fixed mortgage rates that had persisted through the year so far.
Average residential rental property yields were only 3%, yet mortgage rates were closer to 7%.
What that means is investors’ incomes are a long way from covering their mortgages. Landlords who have borrowed heavily must top up the difference.
The disparity between gross rental yields and mortgage rates marks the widest gap observed since 2008, Davidson said.
“Rents are nowhere near enough to cover the mortgage for a typical debt-backed purchase in the current market, let alone other running and maintenance costs, so an investor’s cashflow needs to be supplemented from other income,” Davidson said.
Changes to aspects like tax deductibility and borrowing ratios are “red herrings” compared to the nub of the issue: that punitive rental yield gap.
Davidson said these were averages and individual investors might well be able to buy a property that delivers a yield much higher than 3%.
His data is based on average residential prices and average rents but he acknowledges many people did not fulfil those statistical averages.
Yawning gap between rental yields and fixed mortgage rates. Image / CoreLogic
The measure of yields, based on average property values and rents, might not necessarily represent the actual experience of all investors, especially existing owners who have held for many years.
But the big-picture conclusions still hold, he said.
CoreLogic data shows 21% of all residential buyers are investors “when normally it would be around 25% or up to 30%”.
When he gets anecdotes about how people are still getting purchase sums to stack up, it is often about people finding absolute bargains, or they have renovation plans such as adding another bedroom or they might not need to borrow to the maximum. In these cases, the sums are more favourable.
But he thinks sentiment will shift when the Reserve Bank lowers the Official Cash Rate and mortgage rates start to drift lower.
“No doubt that will start to shift things for some investors but that’s when they’ll also need to be mindful of the new introduced caps on debt-to-income ratios,” Davidson said.
The Herald reported this month how the Reserve Bank softened its tone on the potential for interest rate cuts to come sooner. It said monetary policy had “significantlyreduced consumer price inflation” as opposed to previously just saying “reduced”.
Davidson said Ministry of Business, Innovation and Employment rental bond information showed rents rose fastest in Westland, up 23% in the last year. But that is a relatively small area, so he is more interested in:
Rotorua rents up 11%;
Upper Hutt, Nelson and Palmerston North rents up 10%;
Hastings rents up 9%;
New Plymouth rents up 8%;
Christchurch rents up 7%;
Lower Hutt rents up 4%;
Wellington city rents up 3%;.
The yield-to-mortgage gap persists despite New Zealand’s rental growth still running at historically high levels. Rents increased 6% in the year to May, a growth rate that’s almost twice the long-term average of 3.2%, Davidson said.
In April, the Herald reported Auckland rents rose 5.6% annually until the end of March to hit an average $671.35 a week, but nationally rents were up 8.3% in the past year, with rising immigration and a larger number of students being cited as driving factors.
Barfoot & Thompson data based on the 17,500 Auckland properties it manages showed how average weekly rents were up 5.6% in this year’s first quarter.
Data from Trade Me in April showed the national median rent reached $650 a week, up 8.3% annually. The sharpest increase was in the Manawatū/Whanganui region, which was up 10% to $550.
On July 24, Barfoot and Thompson said the average Auckland rent was 5.59% higher than a year ago, rising by $35.91 to $678.30 per week.
In comparison, June 2023′s average Auckland rent was up just 3.40%. In the South Auckland, Franklin/rural Manukau, Pakuranga/Howick and central Auckland areas, the average rent rose 6.28% to 7.01% in June this year, up to $46.04 more per week, compared to areas like Rodney, up 3.81% or $24.74.
Properties with five or more bedrooms attracted higher rent rises, up 6.52% on last year, while three-bedroom properties were were subject to lower price pressure than homes of other sizes, up 4.99%.
Not all data shows rents going up.
Taking a shorter-term measure, data shows rents trending down.
Stats NZ now collects rental price data monthly and the last few months show rental prices falling in Wellington, Auckland, and Canterbury.
The charts above show that clearly.
Herald journalist Liam Dann noted these trends in his Inside Economics column of July 24.
Stats NZ’s rental price data comes from the record of new bonds lodged with the Ministry of Business, Innovation and Employment. So it’s very robust for new tenancies, he wrote.
But shouldn’t more people be buying, not renting?
Should the yield gap and landlords’ finances be a focus?
Shouldn’t the focus be on encouraging more people to buy homes?
A Deloitte report for Westpac, released in July, projected home ownership rates would fall to 47.9% by 2048, resulting in the bank touting the potential of shared home ownership schemes, although it would not commit to easing its lending practices.
Around 60% of us now own our own home but on current trends that will fall below 50% in the next 25 years.
Yet as the Deloitte report noted, home ownership brings many family benefits, including greater financial and personal wellbeing, and better connectedness to communities.
The report found that 152,000 New Zealand households were potentially eligible for shared home ownership pathways; however, only about 53,000 were aware of them.
This relatively new Government is certainly reforming the property sector, even though some of it isn’t pro-tenant, reversing Labour’s strengthening of tenant rights.
Economist and consultant Shamubeel Eaqub.
Some of the changes from the Government in the last few months are: forcing most building inspections to be remote; reforms to release a “flood” of new houses to the market by strong-arming councils to liberalise planning regimes; fast-track consenting; granny flat incentives; Resource Management Act reform; banning rules discouraging tiny apartments; reversing pro-tenant laws; allowing landlord tax deductions again; cutting timeframes on taxing house sale profits; scrapping first-home buyer grants; promoting build to rent; having Sir Bill English review Kāinga Ora; and talk of reviewing the $2.34 billion-plus accommodation supplement.
Economist Shamubeel Eaqub co-authored a chapter in a new Bridget Williams Book, Urban Aotearoa – The Future of our Cities, edited by David Batchelor and Bill McKay.
He has also noted those Government trends but says results certainly aren’t immediate.
Eaqub sees progress on the housing front, saying the current period of housing policy reform is the most expansive since the 1950s but it won’t happen fast.
Policies are still being implemented and will not reliably speed up new supply and increase delivery capacity and capability for some years, Eaqub says.
In January, CoreLogic reported that interest rate rises and turbulent property market conditions through 2023 did little to deter first-home buyers, whose market share hit a new record high at 27% in the final months of the year.
Figures showed activity reached 27% in December.
Davidsonsaid first-home owners may have been the biggest property market success story of 2023. This was the first time they had out-bought other buyer groups, he said.
Interest.co.nz reported on July 30 that first-home buyers’ estimated market share of housing sales in June, based on mortgages approved to them as a percentage of REINZ sales, was “a whopping 50.4%. That is an all-time high outside the peak Covid period in 2020, when the figures became briefly volatile and unreliable”.
Anne Gibson has been the Herald’s property editor for 24 years, written books and covered property extensively here and overseas.
