The days of buying a stand alone, three bedroom house as a residential property investment may be drawing to close, with interest.co.nz's second quarter update of indicative rental yields and cash flows showing the yields for investors on three bedroom houses are poor and the cash flows they're likely to generate are even worse.
The figures also show investors are likely to find much more attractive options among multi-unit properties such as apartments and home units.
Interest.co.nz tracks the Real Estate Institute of New Zealand's lower quartile selling prices for the three main types of residential investment properties; three bedroom houses, two bedroom apartments/units, and one bedroom apartments/units, in each of the country's main urban areas and updates them quarterly.
These are then matched with the weekly rents charged for new tenancies in the same types of properties in the same districts over the same time period.
Those figures are used to provide a gross indicative yield for these types of properties in each area.
Interest.co.nz also calculates how much money would be left over from the rental income once mortgage payments on the properties were paid, assuming the mortgage was for 60% of the purchase price and over a 20 year term, to give an idea of likely cash flow. - both sets of figures are displayed in the tables below.
Both figures suggest three bedroom houses are likely to provide investors with pretty poor returns.
The gross yields on three bedroom houses ranged from 3.4% in the Waitemata & Gulf and Orakei wards in Auckland City, to 6.8% in Invercargill (see the map below for the location of Auckland Council wards).
Whanganui, Dunedin and Invercargill were the only districts where the yields were above 6%.
The yields for three bedroom houses were particularly low in Auckland, averaging 4.6% across the region, and ranging from 3.4% in the Waitemata & Gulf ward to 5.2% in the Manurewa-Papakura ward.
The average yield across the entire country for three bedroom houses was 5.8%.
While the yield figures suggest pretty meagre returns, the cash flow figures are disastrous.
Of the 40 urban districts tracked by interest.co.nz, 18 would have produced negative cash flows once the mortgage was paid (three bedroom houses only).
Essentially the rent would not have been enough to cover the mortgage payments, assuming the mortgage was on the terms outlined above.
The cashflows ranged from minus $553 a week in Auckland's Waitemata & Gulf ward, to plus $103 a week in Invercargill.
And even those places where cash flow was positive would probably be looking at negative cash flows once other expenses such as rates, insurance, repairs, maintenance and periods of vacancy are factored in.
Those figures suggest that anyone buying a three bedroom house as an investment in the second quarter this year was probably having to put their hand in their pocket to meet the outgoings in the hope of making a capital gain at a later stage, and that probably hasn't gone to well for them recently.
However, both the yields and cash flows for multi-unit dwellings look much more favourable for investors.
The average gross yield for two bedroom units was 7.3% nationally in the second quarter, and gross cashflow was a positive $159 a week.
That still wouldn't leave much to play with once the non-mortgage expenses are paid and an extended period of vacancy could be disastrous, so it should probably be described as marginal, but at least its not underwater.
The stars of the show for investors are one bedroom units.
On average these provide an average gross yield of 11.1% and average gross cash flow, after mortgage payments but before other outgoings, of $238 a week.
At that rate investors might even make a few pennies.
| Indicative Gross Rental Yields & Gross Cash Flows | ||||||
| For Residential Investment Properties | ||||||
| By Main Housing Types | ||||||
| Q2 2024 | ||||||
| District | Three Bedroom House | One bedroom unit/apartment | Two bedroom unit/apartment | |||
| Gross Rental Yield | Gross weekly cash surplus/deficit after mortgage paid | Gross Rental Yield | Gross weekly cash surplus/deficit after mortgage paid | Gross Rental Yield | Gross weekly cash surplus/deficit after mortgage paid | |
| Whangarei District | 5.8% | $45 | 8.2% | $137 | 6.3% | $70 |
| Auckland Region | 4.6% | -$128 | 15.4% | $313 | 5.7% | $37 |
| Rodney Ward | 3.8% | -$265 | ||||
| Albany Ward | 4.2% | -$201 | 5.1% | -$27 | 4.7% | -$84 |
| North Shore Ward | 4.1% | -$231 | 5.4% | $7 | 4.5% | -$129 |
| Waitakere Ward | 4.5% | -$124 | 4.4% | -$97 | 4.9% | -$52 |
| Waitemata and Gulf Ward | 3.4% | -$553 | 24.8% | $376 | 22.1% | $470 |
| Whau Ward | 4.2% | -$187 | 8.7% | $176 | 5.2% | -$13 |
| Albert-Eden-Puketapapa Ward | 3.6% | -$385 | 6.0% | $54 | 5.2% | -$17 |
| Orakei Ward | 3.4% | -$491 | 5.8% | $40 | 4.4% | -$139 |
| Maungakiekie-Tamaki Ward | 4.0% | -$266 | 6.1% | $62 | 5.6% | $32 |
| Howick Ward | 3.8% | -$312 | 4.9% | -$47 | 5.0% | -$51 |
| Manukau Ward | 5.1% | -$42 | 5.9% | $40 | 5.9% | $56 |
| Manurewa-Papakura Ward | 5.2% | -$27 | 5.5% | $13 | ||
| Franklin Ward | 4.7% | -$97 | ||||
| Hamilton City | 5.2% | -$25 | 5.7% | $18 | 5.1% | -$24 |
| Taupo District | 5.4% | $5 | ||||
| Tauranga City | 5.0% | -$46 | 5.3% | -$9 | 5.8% | $52 |
| Rotorua District | 6.0% | $60 | 7.5% | $156 | ||
| Whakatane District | 5.4% | $2 | 5.0% | -$32 | ||
| Hastings District | 5.9% | $58 | 5.8% | $38 | ||
| Napier City | 5.6% | $33 | 8.6% | $218 | ||
| New Plymouth District | 5.9% | $57 | 8.5% | $138 | 6.0% | $49 |
| Whanganui District | 6.4% | $82 | 7.6% | $103 | ||
| Palmerston North City | 5.7% | $40 | ||||
| Kapiti Coast District | 5.4% | N/A | 5.2% | -$25 | ||
| Porirua City | 0.0% | N/A | 7.4% | $195 | ||
| Upper Hutt City | 5.7% | $41 | 5.6% | $19 | ||
| Lower Hutt City | 5.8% | $54 | 8.4% | $170 | 6.6% | $115 |
| Wellington City | 4.9% | -$76 | 7.8% | $147 | 6.8% | $132 |
| Nelson City | 5.3% | -$9 | 5.8% | $29 | 5.7% | $26 |
| Marlborough District | 5.5% | $10 | 4.5% | -$31 | ||
| Waimakariri District | 4.9% | -$54 | 0.0% | -$108 | ||
| Christchurch City | 5.3% | -$9 | 7.8% | $134 | 6.4% | $87 |
| Selwyn District | 4.8% | -$68 | ||||
| Ashburton District | 5.7% | $26 | 0.0% | -$289 | ||
| Timaru District | 5.6% | $18 | 0.0% | -$449 | 5.2% | -$10 |
| Queenstown-Lakes District | 3.8% | -$354 | 9.1% | $225 | 6.4% | $121 |
| Dunedin City | 6.1% | $74 | 6.5% | $71 | 7.4% | $131 |
| Invercargill City | 6.8% | $103 | 8.6% | $152 | ||
| All of Aotearoa | 5.8% | $47 | 11.1% | $238 | 7.3% | $159 |
| Notes: All indicative yields are based on the REINZ's lower quartile selling price and Tenancy Services median rent for each property type in each district for Q2 2024. Where a field is vacant, it is because there were insufficient sales/tenancies for that type of property to produce a reliable yield/cash flow figure. All figures are gross and do not include any allowance for insurance, rates, repairs, maintenance or other expenses or periods of vacancy. Figures are based on properties being purchased with a 40% deposit and 60% mortgage. Mortgage interest rate used was 6.50% with a 20 year term. | ||||||
Auckland Council Wards
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30 Comments
Renters are all being funnelled into Govt owned social housing and foreign owned Build To Rent high rises. The days when low income people could still enjoy a traditional Kiwi lifestyle of raising their kids in a nice house in a decent suburb, are over. This is how you perpetuate inequality and fuel the increasing resentment that can then be harnessed by Left leaning political parties pushing identity politics and socialism as the "solution".
Spot on, you can just see all the public and private social housing providers rubbing their hands with glee as their social empire (and their self-importance) grows.
As C S Lewis noted:
“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience. They may be more likely to go to Heaven yet at the same time likelier to make a Hell of earth. This very kindness stings with intolerable insult. To be "cured" against one's will and cured of states which we may not regard as disease is to be put on a level of those who have not yet reached the age of reason or those who never will; to be classed with infants, imbeciles, and domestic animals.”
How is it a better deal? Being forced to live in social housing ghettos alongside gang members, drug addicts, and sex offenders while being wholly funded by taxpayers is good? Raising kids in high rises with no space to play while all profits are sent offshore to foreign owners is good?
I'd take the old Kiwi lifestyle of a suburban house any day thanks.
What do you think happens when Govt policies make it financially unviable to provide private rental housing? When the only providers left in the market are the Govt and the foreign corporates who get huge tax incentives and subsidies to undertake BTR developments but then operate at a "loss" forever while the cash is repatriated offshore tax free to owners?
"What do you think happens when Govt policies make it financially unviable to provide private rental housing? When the only providers left in the market are the Govt and the foreign corporates who get huge tax incentives and subsidies to undertake BTR developments but then operate at a "loss" forever while the cash is repatriated offshore tax free to owners?"
Doesn’t NZ need more new housing for its residents? If New Zealanders don't want to build it (given the change in interest deductibility for existing dwellings making new builds less attactive) then should we let those who want to build do it?
When you refer that BTR operate at a loss, are you referring to the depreciation deduction that they get for tax that current buyers of new builds get ring fenced? (Interest deductibility is available for buyers of new builds for current buyers of new builds in the long term and short term rental market.)
"Both figures suggest three bedroom houses are likely to provide investors with pretty poor returns"
To the benefit of FHB's owner occupiers this is further confirmation there need be no hurry to buy. This would suggest this segment will certainly underperform in the capital gains department. This in itself will motivate more short sighted investors to exit. For the near future unsold inventory will just keep piling on.
You have got it wrong as usual RP. All that will change is the very slow move away from 3 bedroom houses as rental investments. Like I said the other week, 3 bedroom houses on decent bits of land will continue to outpace townhouses in house price gains, its pretty obvious really. There will be no unsold 3 bedroom house inventory piling on because 45% of all new builds now are town houses. The figures are just a sad reflection that house price gains have outstripped wage growth in this country and yes you are now going to get funnelled into a townhouse as the only affordable option.
"All that will change is the very slow move away from 3 bedroom houses as rental investments"
So you agree but it's going to happen "sloooooooowly". Funny how your focus has shifted to 3-bedroom houses that sit on their lonesome on large tracts of developable land - how convenient. Is this the only way a FHB can purchase a 3-bedroom house?
I think my original point still stands. Given the current state of this market investor exit cannot be quick without colossal loss. On the ride down, housing can prove notoriously illiquid as an investment if one is trying to exit. Why be the bag holder of an underperforming investment? Through their usual shortsightedness, many will have already decided other ways to invest. As soon as they possibly can, they will give it a shot. It's a long term overhang -edit
That is correct, and its certainly happening in my area. Standalone family homes are sky rocketing in value (not helping my rates situation!) while the market is flooded with unsold 2 bedroom townhouses crammed on to sections. There are very few new houses being built in my area, so the value of the existing ones keep going up. And as the prices of them go up, the rental yields become ever more ridiculous. I'm considering renting my house out and going to QLD but I would get a 2.8% gross yield if I did that. That makes it a no brainer to just sell up and go, and put the extra cash in the stock market for a 5-6% net return.
Unless you are a Simplicity fund unit holder, in which case investing your money in low yielding residential returns is an idiot idea. The only way that makes sense is if BTR rents are much higher than normal rents - which you currently see with the existing BTR projects charging $600 for a studio unit (and targeting overseas immigrants who cant get normal rentals).
Let's be real. Most "investors" are only in it for the speculative tax free capital gain. Little to no capital gain in appartment type dwelling so most are not interested. With today's stupid house prices and normalizing interest rates, there is little in the way of capital gain on a normal house either.
Ergo, little interest from "investors".
Need more one bedroom places built. So hard to find place to yourself if you're a single or below median earner couple. Nationals simplification of balcony requirements etc will help a lot. Often councils have drafted these rules to (intentionally or otherwise) to disincentivise 1 bedroom or studio apartments.
The market wants that product, landlords can provide the capital. Only missing link is being able to build them profitably.
The article fails to mention South Taranaki where gross yields for 3 bedroom houses are regularly 7+% Plenty of large subdividable/second-dwelling-able sections where transporting on another dwelling could easily result in double figure gross yields. There are possibly other unmentioned markets where this is also the case?
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