The returns on residential investment property remained poor in the third quarter of this year (Q3), although the decline in mortgage interest rates improved investors' cash flows, according to interest.co.nz latest residential rental yield and cash flow calculations.
Interest.co.nz tracks quarterly changes in the the Real Estate Institute of NZ's lower quartile selling prices and rental bond data. This is to calculate indicative gross rental yields for three bedroom houses and one and two bedroom units/apartments, in all of the main urban areas around the country.
We also use the above data to calculate how much of the rental income from those properties would be left over after the mortgage was paid, assuming the mortgage was for 60% of the lower quartile price and over a 20 year term.
As usual, there were significant variations by property type and location.
Three bedroom houses are generally a poor investment
For three bedroom houses there was very little movement in either the lower quartile price or the median rent at the national level between Q2 and Q3.
The national lower quartile price for three bedroom houses declined marginally from $585,000 in Q2 to $580,000 in Q3, while the median rent for the same was unchanged at $650 a week, which meant the gross rental yield was also unchanged at 5.8%.
The only meaningful change was in the mortgage interest rates used in the calculations, which declined from 6.5% in Q2 to to 5.68% in Q3.
That substantially increased the cash surplus left over once the mortgage was paid, from $47 a week in Q2 to $133 a week in Q3.
Although that appears to be a significant improvement, it's still a very poor return, because the landlord would still have to pay expenses such as rates, insurance and maintenance from the surplus and also allow for periods of vacancy when there was no rental income.
The situation is even worse for three bedroom houses in high cost areas such as Auckland, Tauranga and Queenstown, where the gross rental yields remained below 5% in Q2 and cashflows were still strongly negative, although the outflow of cash has been reduced form Q2. See the first table below for the indicative yield and cash flow figures in all main urban districts.
Essentially what these figures show is that three bedroom houses are mainly a poor investment from a cash flow perspective and investors buying at Q3 metrics would be heavily reliant on future capital gains to eventually make some meaningful money.
Rents and selling prices of two bedroom units both in decline.
There were small declines in both the REINZ's national lower quartile price and the median rent for multi-unit properties with two bedrooms in Q3 this year.
The lower quartile price dropped from $427,875 in Q2 to $420,000 in Q3, while the median rent for these properties declined form $600 a week to $590.
However one balanced out the other in the yield calculation which remained unchanged at 7.3%.
The bright spot for the two bedroom units was the decline in mortgage rates, which pushed the post-mortgage cash surplus up from $159 a week to $184. That's the highest cash flow of the three property types monitored in this series, suggesting they may be occupying something of a sweet spot in the market for investors at the moment.
One bedroom units/apartments show big price gains - lower yields.
There was a substantial increase in the REINZ's national lower quartile price of multi-unit properties with one bedroom, which rose from $215,000 in Q2 to $269,500 in Q3 (+25%), while the national median rent for these types of properties declined slightly from $460 a week to $450.
That pushed their indicative gross yield down from 11.1% to 8.7%.
The higher median price also pushed down the indictive post-mortgage cash surplus, from $238 a week in Q2 to $150 a week in Q3, even after allowing for the decline in mortgage interest rates.
One bedroom units have traditionally provided the best rental returns for investors so are less reliant on capital gains. Although in certain markets, such as central Auckland, overseas students make up a large proportion of their tenants, which can make the returns subject to high levels of vacancy from time to time, meaning their returns can be volatile.
In particular, this shows up in the one bedroom table below for those properties in Auckland's Waitemata & Gulf Ward, which provides staggering indicative yields of 19.5% and post-mortgage cash of $334 a week.
That's nice money if you can get it, but of course if something seems too good to be true then it probably is, and those figures are no different.
One of the main reasons the one bedroom apartments in this part of Auckland provided such apparently fabulous returns is that large numbers of them are on leasehold titles, which means they can sell for very low prices.
Although that provides a high gross return, much of that cream will be siphoned off by ground rent payments, which along with allowances for vacancies, will bring net returns back to more realistic levels.
This can be a trap for inexperienced investors who are unfamiliar with the ins and outs of this particular niche market.
| Indicative Rental Returns for a Three Bedroom House | ||||
| Indicative Gross Rental Yield | Indicative weekly gross surplus/deficit after mortgage paid | |||
| District | Q2 2024 | Q3 2024 | Q2 2024 | Q3 2024 |
| Whangarei District | 5.8% | 5.9% | $45 | $610 |
| Auckland Region: | 4.6% | 4.6% | -$128 | -$68 |
| Rodney Ward | 3.8% | 4.0% | -$265 | -$162 |
| Albany Ward | 4.2% | 4.3% | -$201 | -$129 |
| North Shore Ward | 4.1% | 4.1% | -$231 | -$160 |
| Waitakere Ward | 4.5% | 4.5% | -$124 | -$81 |
| Waitemata and Gulf Ward | 3.4% | 3.3% | -$553 | -$488 |
| Whau Ward | 4.2% | 4.2% | -$187 | -$126 |
| Albert-Eden-Puketapapa Ward | 3.6% | 4.0% | -$385 | -$192 |
| Orakei Ward | 3.4% | 3.6% | -$491 | -$338 |
| Maungakiekie-Tamaki Ward | 4.0% | 4.1% | -$266 | -$172 |
| Howick Ward | 3.8% | 3.9% | -$312 | -$197 |
| Manukau Ward | 5.1% | 4.8% | -$42 | -$29 |
| Manurewa-Papakura Ward | 5.2% | 5.1% | -$27 | $4 |
| Franklin Ward | 4.7% | 4.7% | -$97 | -$48 |
| Hamilton City | 5.2% | 5.1% | -$25 | $11 |
| Tauranga City | 5.0% | 4.9% | -$46 | -$14 |
| Rotorua District | 6.0% | 6.6% | $60 | $147 |
| Whakatane District | 5.4% | 5.3% | $2 | $31 |
| Taupo District | 5.4% | 5.3% | $5 | $33 |
| Napier City | 5.6% | 5.4% | $33 | $52 |
| Hastings District | 5.9% | 6.7% | $58 | $162 |
| New Plymouth District | 5,9% | 5.8% | $57 | $84 |
| Whanganui District | 6.4% | 6.7% | $82 | $135 |
| Palmerston North City | 5.7% | 6.1% | $40 | $103 |
| Kapiti Coast District | 5.4% | 5.2% | $0 | $22 |
| Porirua City | n/a | 5.7% | n/a | $81 |
| Upper Hutt City | 5.7% | 5.5% | $41 | $55 |
| Lower Hutt City | 5.8% | 6.1% | $54 | $120 |
| Wellington City | 4.9% | 5.0% | -$76 | $0 |
| Nelson City | 5.3% | 5.1% | -$9 | $15 |
| Marlborough District | 5.5% | 5.5% | $10 | $49 |
| Waimakariri District | 4.9% | 5.1% | -$54 | $11 |
| Christchurch City | 5.3% | 5.3% | -$9 | $35 |
| Selwyn District | 4.8% | 4.8% | -$68 | -$34 |
| Ashburton District | 5.7% | 6.0% | $26 | $80 |
| Timaru District | 5.6% | 5.8% | $18 | $65 |
| Queenstown-Lakes District | 3.8% | 4.2% | -$354 | -$182 |
| Dunedin City | 6.1% | 5.9% | $74 | $88 |
| Invercargill City | 6.8% | 6.8% | $103 | $133 |
| All of Aotearoa | 5.8% | 5.8% | $47 | $90 |
| Indicative Rental Returns for a Two Bedroom Unit/Apartment | ||||
| Indicative Gross Rental Yield | Indicative weekly gross surplus/deficit after mortgage paid | |||
| District | Q2 2024 | Q3 2024 | Q2 2024 | Q3 2024 |
| Whangarei District | 6.3% | 6.2% | $70 | $91 |
| Auckland Region: | 5.7% | 5.8% | $37 | $82 |
| Rodney Ward | 5.5% | $51 | ||
| Albany Ward | 4.7% | 4.4% | -$84 | -$86 |
| North Shore Ward | 4.5% | 4.4% | -$129 | -$82 |
| Waitakere Ward | 4.9% | 5.7% | -$52 | $66 |
| Waitemata & Gulf Ward | 22.1% | 18.9% | $470 | $441 |
| Whau Ward | 5.2% | 5.2% | -$13 | $17 |
| Albert-Eden-Puketapapa Ward | 5.2% | 5.2% | -$17 | $28 |
| Orakei Ward | 4.4% | 4.6% | -$139 | -$68 |
| Maungakiekie-Tamaki Ward | 5.6% | 5.9% | $32 | $94 |
| Howick Ward | 5.0% | 5.1% | $56 | $7 |
| Manukau Ward | 5.9% | 6.2% | $56 | $117 |
| Manurewa-Papakura Ward | 5.5% | 5.0% | $13 | $1 |
| Franklin Ward | 6.3% | $117 | ||
| Hamilton City | 5.1% | 6.0% | -$24 | $90 |
| Taupo District | ||||
| Tauranga City | 5.8% | 6.1% | $52 | $109 |
| Rotorua District | 7.5% | 6.3% | $156 | $99 |
| Whakatane District | 5.0% | -$32 | ||
| Hastings District | 5.8% | $38 | ||
| Napier City | 8.6% | 7.1% | $218 | $173 |
| New Plymouth District | 6.0% | 7.3% | $49 | $163 |
| Whanganui District | 7.5% | $147 | ||
| Palmerston North City | 6.6% | $108 | ||
| Kapiti Coast District | 5.2% | 6.1% | -$25 | $112 |
| Porirua City | 7.4% | 5.9% | $195 | $88 |
| Upper Hutt City | 5.6% | $19 | ||
| Lower Hutt City | 6.6% | 6.6% | $115 | $144 |
| Wellington City | 6.8% | 6.6% | $132 | $148 |
| Nelson City | 5.7% | 5.7% | $26 | $55 |
| Marlborough District | 6.3% | $96 | ||
| Waimakariri District | ||||
| Christchurch City | 6.4% | 6.3% | $87 | $103 |
| Selwyn District | ||||
| Ashburton District | ||||
| Timaru District | 5.2% | 6.4% | -$10 | $83 |
| Queenstown-Lakes District | 6.4% | 5.4% | $121 | $52 |
| Dunedin City | 7.4% | 6.8% | $131 | $128 |
| Invercargill City | 8.6% | 8.9% | $152 | $168 |
| All of Aotearoa | 7.3% | 7.3% | $159 | $184 |
| Indicative Gross Rental Returns for a One Bedroom Unit/Apartment | ||||
| Indicative Gross Rental Yield | Gross weekly cash surplus/deficit after mortgage paid | |||
| District | Q2 2024 | Q3 2024 | Q2 2024 | Q3 2024 |
| Whangarei District | 8.2% | 6.2% | $137 | $75 |
| Auckland Region: | 15.4% | 9.9% | $313 | $232 |
| Rodney Ward | ||||
| Albany Ward | 5.1% | 4.9% | -$27 | -$11 |
| North Shore Ward | 5.40% | 5.8% | $7 | $65 |
| Waitakere Ward | ||||
| Waitemata and Gulf Ward | 24.8% | 19.5% | $376 | $334 |
| Whau Ward | 8.7% | 6.5% | $176 | $106 |
| Albert-Eden-Puketapapa Ward | 6.0% | 6.2% | $54 | $95 |
| Orakei Ward | 5.8% | 5.4% | $40 | $38 |
| Maungakiekie-Tamaki Ward | 6.1% | 6.1% | $62 | $108 |
| Howick Ward | 4.9% | 5.4% | -$47 | $36 |
| Manukau Ward | 5.9% | 6.7% | $40 | $107 |
| Manurewa-Papakura Ward | ||||
| Franklin Ward | ||||
| Hamilton City | ||||
| Tauranga City | 5.3% | 6.7% | -$9 | $116 |
| Whakatane District | ||||
| Rotorua District | ||||
| Taupo District | ||||
| Hastings District | 5.5% | $38 | ||
| Napier City | ||||
| New Plymouth District | 8.50% | 9.0% | $138 | $199 |
| Whanganui District | 7.60% | $103 | ||
| Palmerston North City | ||||
| Kapiti Coast District | ||||
| Porirua City | ||||
| Upper Hutt City | ||||
| Lower Hutt City | 8.4% | 6.4% | $170 | $92 |
| Wellington City | 7.80% | 8.2% | -$76 | $180 |
| Nelson City | 5.8% | 3.9% | $29 | -$120 |
| Marlborough District | 4.5% | -$31 | ||
| Waimakariri District | ||||
| Christchurch City | 7.8% | 5.8% | $134 | $55 |
| Selwyn District | ||||
| Ashburton District | ||||
| Timaru District | ||||
| Queenstown-Lakes District | 9.1% | 9.6% | $225 | $263 |
| Dunedin City | 6.5% | 6.5% | $71 | $92 |
| Invercargill City | ||||
| All of Aotearoa | 11.1% | 8.7% | $238 | $190 |
*This article was first published in our email for paying subscribers first thing Friday morning. See here for more details and how to subscribe.
46 Comments
Yep. The focus is all on tax free capital gain "by accident", which is just more or less straight tax avoidance. This rule should be made easier to interpret and enforce. Something like "if the owner has accepted $1 of income on the property, at any point in its life, then gain on sale is taxed at the normal rate".
How many times have we heard on here that "property investment for the long term" yet the same people have (often unrealistic) expectations that gravitate towards capital gains as if they're bankable in the short term. I'd say that if the yield stacks up on a risk weighted basis when compared to less risker deposits, it's a positive cash flow experience and if being a Landlord is your thing, go for it. That narrows down the field!
PM has already said no CGT ... better returns to be had elsewhere maybe ? Im thinking RE has affordability problems and even if theres a return to nominal interest rates and snowball growth values it likely is entering 'broken model' material that is a domain whereby only an elite % of Kiwis can participate. Unlike the rockstar era, prices for Insurance, materials /goods and services have markedly climbed . Less disposable income is about for the average consumer to throw around. The problem for RE is now making the bigger numbers on paper spit out a return that is not reliant on a CG . What sort of CG do folk imagine is possible buying in the present market place? ...the numbers rockstar has left us are bigger and even though there has been a % value decline, relative to wages/living costs theres a marked disconnect that previously was not present... Last point is the recent OCR adjustment to encourage RE investment or is it to ease some of the heat the banks have on their loan books ... my 10 cents...lol
https://www.rnz.co.nz/news/political/532793/capital-gains-tax-a-timelin…
I disagree (re it being avoidance) and, more importantly, so does IRD.
Let's focus on the long term aspect. This report says 3br properties are barely washing their face. But that is based on a whole bunch of assumptions about the cost at a certain point in time, an assumed level of debt and assumed financing costs. But none of those factors stand still. As interest rates decline, this article shows it changes the performance of the investment. However, it overlooks the return on equity also improves because the default alternative (interest on cash deposits) is also falling. This article is just a snapshot at a single point in time and even without any potential capital gain (which never figured into my expectations when I started), people like me can successfully ride out periods when returns are lower.
@Averageman - tax avoidance is illegal - the sun shines (or sets) for everyone with the same rules applying - if you think the capital gains are massive why dont you do it - i know you like to moan and do nothing - and that is wny you are an average man - you should try the investing you will be average and poor. oh and always moaning
"The only meaningful change was in the mortgage interest rates used in the calculations, which declined from 6.5% in Q2 to to 5.68% in Q3."
Hi Greg, Just wondering ... Is that the right thing to do at this time? From the Monetary Policy Statement. November 2024 (see page 4) ... :
"The average rate on outstanding mortgages has now peaked at 6.4 percent and is expected to decline to 5.8 percent over the next 12 months as borrowers refix their mortgage interest rates at lower levels in line with a falling OCR."
Who in there right mind would leverage into a loss making NZ property investment where the S&P 500 is up
5,998.74+692.70 (13.05%)past 6 months
5,998.74+1,443.85 (31.70%)past year
leverage is easy to get in equities just use CFD or 1 year options. at any point in real time you could short e-minis to be hedged, vs the 6 month sale cycle of pooperty.
Loser (Beck) https://www.youtube.com/watch?v=YgSPaXgAdzE
Ask the PM, the best time to sell was Yesterday........
Easy, the bank will lend you $1 Million to buy a house, the bank will not lend you $1 Million to stick it into the stock market. The house is a physical asset.
This is true Z. Banks are not going to lend anything to kids in their bedroom tracking and punting on Peanut the Squirrel and AI tokens, despite their track record. Doesn't matter if the kids can 100x and are superior speculators to the lanyard community. It's not socially acceptable.
Try these guys big Z, all will offer at least 50 to 1 leverage, so 20k buys a mil
- CMC Markets
- Saxo Bank
- IG Index
I like IG for stock indexs, Saxo are very good for coverage, you can trade damn near anything.
As for crypto I leave that to the pimply faced youths, fortunes have been made.
'Are' being made I think. What's interesting at the moment is that the boomer coins are performing way beyond expectations, mainly because the institutions are buying. The kids don't really play with these as it's not as sexy and it's not where the 100x opportunities are. They're not recycling their gains into the Aotearoa Ponzi. They stay in their zone with stablecoins and the ol' rat poison.
May I ask how you trade? When I last looked, the options I looked at all seemed to come with significant brokerage costs or warnings of long resolution times. To be honest though, I was only looking at the NZ stock market at the time.
Note I'm fairly averse to trading, as my background research for my Masters showed that a) most speculators lose year-on-year, and b) the house always wins. So I'm more interested in real investment pathways.
"I was only looking at the NZ stock market at the time."
There's your problem.
NZ's stock market is quite limited in both breadth and depth. Oz is a tad better, but not much. For a really good selection you need to go to the big financial centers. (Sucks that there's a whole heap of extra admin involved for most Kiwis in keeping IRD happy.) If the selection is overwhelming, might I suggest looking at what some of 'aggressive' kiwisaver schemes are buying / holding / selling as a starting point.
If the selection is overwhelming, might I suggest looking at what some of 'aggressive' kiwisaver schemes are buying / holding / selling as a starting point.
Many do not transact in individual shares, rather they trade equity warrants or trade EFTs with disclosed allocations, they create performance by twisting asset allocations. If you buy a warrant you can invest your base capital and get overnight cash rates as well. not much incentive to try and stock pick US Markets too much anymore outside perhaps the Magnificent 7
Some of the NZ Kiwi savers schemes that hold NZ and Aussie shares do actively trade equities in these countries, but US not so much.
b) the house always wins
this is because the house rarely takes positions, they either find a punter to take the opposite side, or layoff on the other side of the spread.... (betting companies operate there own dark liquidity pools between houses not open to public) again many will just not understand the mechanics of book making in financial markets, or betting.
Its all about the spread or the greeks baby.
~30% after tax for me. It's becoming a real conundrum: I've been renting since I sold my house in Feb 2022 and today my investments (none in RE) are both easily paying the rent and allowing me to save big to the point buying again isn't even a financially-wise decision for me. Even if RE continued to perform 7%/y on average, I'll have no problem catching up and grow savings much faster than that.
Well done KW, but I would back property over equities any day from personal experience.
The thing is property is far safer and you can leverage so much easier, snd you have control of it, unlike equities.
Example if an investor holds $20m of property investment and they go up 7% next year as the RB are calculating then that is $1.4m in potential gain plus rents!
Wouldnt be too many investors prepared to have $20m in equities as there is no doubt there will be another market crash as it is grossly overvalued due to super funds from around the world.
I am more a momentum investor, I only want the knees to the shoulders, willing to give up the head so as not to lose my neck. Single stocks are no longer my interest, too many cases of a bad news release, where you are simply less exposed in an EFT sector bucket.
IE long or short AI or agri or transport etc as a sector investment rather then names in them, names can be fun I owned Ren Tech once, so annoyed when they took that private. But for me now happier to find 1 or 2 baggers not 10 baggers.
i do wonder how much longer the US stock market can keep growing at the rate it has been, many are calling for a correction.
its interesting that a stock market inflation of almost 100% over the last 5 years is good but houses inflating by 21% is bad.
I guess its easier to see the true value in houses then a stock.
What ETF are you in? some of the ETF have very overpriced stocks holding them up IMO
Joe basic S&P 500 ETF hasn’t been too nasty this year. Maybe small caps for a while now.
I think what’s good or bad comes down to no one trying to rent a poorly maintained Nvidia to a poor family……..
I’m not ballsy enough to borrow to invest. If you want to go hard core borrow to buy MicroStrategy! 3x double down right there….
"Who in there right mind would leverage into a loss making NZ property investment where the S&P 500 is up..."
It's all much clearer in retrospect IT GUY.
By the same logic you could also say - Who in their right mind would invest into S&P500 when Bitcoin has gone up over 100%.
The article completely ignores the further negative impact of loss of interest deductibility as expense.
The tax on any mortgaged property atm is what kills any potential investment calculations - this year slightly better but still a big impact on leveraged property investments.
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