Prices and sales volumes were both up for Barfoot & Thompson in September

So the bottom line is....

House prices, applying the median of 635K, have been falling in Auckland for 6 months with the median now down 3% on the March record median of 652K.

8.5x income on a median level and around 7.6x on an average level.  Eyewatering. 

And looking at Barfoot's rental data and assuming a generous average rental level of say $500 per week across Auckland (http://www.barfoot.co.nz/Market-reports/2014/August/Rental-report.aspx) you get to a 3.5% yield on the average sale price.  Or maybe a 4% yield if you're generous and divide the average rental by the median price.

So riddle me this Batman, if your 4% yield converts to a c3.7% yield once you have paid management fees, insurance, maintenance, rates etc, then on current mortgage rates your rent can only cover a mortgage at max 65% of the value of the property.  i.e. this would allow your net rent to cover a mortgage at 5.75% and the equity would have no income whatsoever.

Now if you bought a house all equity, then your net yield of 3.7% would be 2.5% after tax (at top tax rate) which would be well below the 3.4%+ after tax you can get from a zero-risk bank account.

So there is no net risk adjusted yield income to the equity on either of these equations (levered or unlevered).  So the only reason any "investor" is buying property today has to be for capital gain alone. ie they are buying solely for the purpose of resale. 

Unless you believe that property investors are all charities giving their money away.

Let's forget arguments for new Capital Gains Taxes.  We have one already that should be applying to every house purchase in today's market, if the IRD was doing their job properly.  So...

"Dear Mr IRD, if a property purchaser cannot mathematically earn a net equity income (above risk free savings) from a risky property, it is clear that despite what representations they may make about "buying for rental purposes", this is a lie and they are buying for the purpose of resale and the consequent capital gain.  This has been going on for the past 3 years since yields in Auckland got to silly levels. 

Therefore please do your job (I'm assuming you have some employees that have done high school maths) and slap a nice marginal income rate tax on the seller of every house that has been bought since roughly the end of 2012.  If you refuse to do so then you are acting against the law in not enforcing a legal tax and you yourself should be prosecuted and imprisoned.

You know who these "investors" are through land registry records and you have their IRD numbers therefore your enforcement costs are negligible, which only compounds your current negligence in not acting.

Yours sincerely,

Concerned taxpayer who doesn't think you are doing your job properly."

PS: I strongly suggest that someone starts sending Parliamentary Questions to the IRD Minister (I believe it is Hon. Todd McLay) asking him why the IRD is not doing their legally required job properly in the face of overwhelming, irrefutable mathematical evidence.  And why as a consequence the Government is effectively choosing to not impose an existing legal tax on certain "privileged" taxpayers. 

It is sort of like allowing the IRD to randomly stop taxing certain companies on the NZX if they "say" they are planning to give all their profits to charity (despite the fact they never do).

You know the property market is dysfunctional when house prices become un-affordable for locals.

Why? Because housing is exploited by greedy capitalists at the expense of peoples basic needs.

The current system needs an urgent overhaul in order to meet social and environmental needs.

Amateurs often make the mistake of taking average house prices divided by average rent and then claim that rental yields are impossibly low.

Even Barfoot's (who should know better ) are not immune from the same blunder.

Read from Olly Newland's website

http://www.ollynewland.co.nz/barfoots-gets-numbers-confused/6696/

"Most houses are sold to owner occupiers, and it is only the cheaper houses that are usually sold to investor/ landlords.

If you want to make  comparisons, then you must take the average sale price of  properties sold to investors and then do the maths.

While it is true that some “expensive” houses are sold to investors, the majority are at the cheaper end".

A (partly) valid point.  Although as someone who has rented a number of houses in Auckland (large ones in good suburbs with values in the $1-2M range) I have never paid a yield with more than a 3 handle.  The landlords have in 2 cases been offshore resident and one was a local.

Wrong wrong wrong Mr Bear.

If you rent high value homes then naturally you will see a low yield owner. If you rent a low cost home you will see a stronger yield owner. Your point is completely erroneous and only points out that owners who rent out high value homes make low yields.

About the only interesting fact you have there is that it may be (small sample size ignored) largely offshore investors buying high end homes. If so what leads you to believe they are worried about yield? If it’s a diversification play they may also own a dozen low cost homes, or homes in a dozen nations. Who knows? I know you don’t. But there are thousands of different reasons that could explain someone buying a high cost home for rent, thus IRD struggles.

Another reason people may buy a low yielding home is because they expect NZ to grow and rents to rise. Maybe they are right, maybe they are wrong but there is no way for us to say that in 20 years they won’t be doing just fine.

The majority of investors are buying reasonably yielding homes. 5% - 5.5% plus. 6% plus if they take care or compromise on potential capital gains.

Homes in NZ are overvalued for the simple and obvious fact that homes track affordability. Said another way, a borrower will borrow as much as they can and then buy what they can, for that amount of money.

Said yet another way, interest rates have been held too low for too long and we have a housing bubble driven by HOME OWNERS, not investors or speculators.

If anything, when/if this bubble deflates somewhat, investors will be less effected, because they are LESS likely to buy an overvalued home.

I'm obviously not wrong about my own circumstances to the best of my knowledge. And I'm pretty sure I'm not wrong about standard yields in Auckland for the bulk of the Barfoot rental metrics (3 bed houses-check their website). And my numbers above were based on median not average so take out the upper end outliers.
I'm also pretty sure that there are an awful lot of rentals available in good suburbs given I have rented a few of them, always had choice and always paid rent below the ask.
Of course there are landlords owning all over but I would add that your 5 to 5.5% yield (gross) metric still relies on capital gain to make you a real return. Hence you can't be buying except in the expectation of eventual gain on sale in which case you should pay tax on the gain at your marginal tax rate.
NZ house prices are due for a fall anyway so it will probably be moot. Auckland has a correction every 5-6 years without fail. It's never large but anyone buying today will suffer a 10% value drop in the next 2 years. Long term they will make c6% per year capital growth but with volatility. Don't get me wrong, property is a good part of a diversified portfolio, but it is generally pretty low return and you either have to time it perfectly or be prepared to hold. And the hold strategy requires you to have low leverage as interest rates will only rise from here.

Assets have two components; cost and income.

If an asset has no income, it can be leased or otherwise contracted out to the market for periods of time. This will grant any asset income. Therefore all assets are also streams of income.

So income has a cost to purchase it and that cost varies with time.

If your core thesis is that GDP, over a long time frame, will likely rise, then you’re also saying that income across the board is likely to rise.

That means the cost to buy income can be discounted against future gains. Thus you can seemingly 'overpay' for income today but actually be completely fine. What changes is how long it takes to break even. It is often acceptable for investors to accept years of losses in order to purchase the income stream, provided he believes that the income stream can access long term GDP growth in some way or another.

In a low interest rate environment this length of time to break even will obviously increase, said another way, net return over time reduces as interest rates reduce. This is probably what you are identifying. It’s likely true that investors today are accepting longer periods of time to break even. But that is often because they are simply choosing not to speculate, rather, to always be investing. None the less, it is likely they will profit in time, based on incomes rising with time.

Said another way, investors with exposure to residential investment property believe that they will profit with time, because RENTS will rise.

If GDP will rise, then incomes will rise. Property is one approach to leverage that.

In 25 years ask even your foreign, low yield investors, if they regret their decision, when compared to term deposit holders of similar duration.

This very reasonable argument is why IRD is unable to tax the capital gains of most investment porperty owners.

You lost me there.  Assets with no income can be put into the market to get income?

I think what you are trying to say is (correctly) a house is only worth what it earns you in saved rent or earned rent.  And as any good investor will tell you, the value to you is influenced by your opportunity cost and how you can finance it.  So as debt costs go up you can pay less.  And as yield falls relative to other assets, you want to pay less as you can earn more elsewhere.

Your idea of discounting future cashflows, including capital gains, to assess value is right, and you use a discount rate that reflects your opportunity cost of that investment, including how liquid it is.

It is the wrong time to invest in residential property in Auckland.  But i know the "property investors" will disagree and that is fine as they provide liquidity for those of us who see the cycles for what they are and choose to sell high rather than buy high. 

You're all missing the point.   Houses haven't gone up, fiat currency has gone down!

 Look at the price of gold since Alan Greenspan lowered interest rates in 2002.  Compare gold, which is real money, to NZ houses prices and realise that the NZD is gradually losing purchasing power, albeit slightly slower that other fiat currencies.  ZIRP NIRP and QE are acts of suicidal desperation by central banks to deliberately devalue their respective domestic currencies thereby, reducing debt burdens and fostering domestic exports.  To bad for citizens saving money in the bank!

NZ domestic interest rates may affect the provinces but not the tier 1 suburbs of Auckland like Kohimarama, Mission Bay, St Heliers, Remuera etc.   Sales in those areas are completely dominated by capital flight from foreigners who are using foreign cash sourced at ultra low interest rates.  Great for retiring baby boomers, but nightmarishly bad for first home buyers who are saving cash to buy a house.  That's why the RBNZs high OCR, LVRs and "interventions" to lower the dollar are a cruel joke on savers.  Those policies just make it easier for foreign cash to blow kiwi savers out of the market and turn them into renters.

Who said keeping cash in the bank is safe.  No its not! look at the Open Banking Resolution and covered bonds.  Look at the trillions of debt and worthless derivatives on central bank balance sheets.  Look at global GDP plummeting and realise that during the next crisis you'll lose pretty much all your deposits in the bank.   Nobody cares that their rental yield is below 3%!  It's a hard asset which will always be worth some equivalent of human labor, and it wont evaporate in a banking crisis.  Nobody cares about the yield anymore.   Oh by the way, your government doesn't care about you either, unless you're in the top 1%.