Rental returns on residential investment properties have been steadily declining for more than 20 years, while capital returns have generally been much higher but also more erratic, according to research by Colliers International.
Based on the REINZ’s median selling prices and the average rent figures compiled by the Ministry of Business, Innovation and Employment’s tenancy bond centre, both of which Colliers has tracked since 1993, net rental income returns* have dropped from 5.4% (pre-tax) in the third quarter of 1993 to 3.3% in the third quarter of this year, with the decline being slow and steady (refer tables below).
Over the same period, capital returns, (the annual improvement or decline in a property’s capital value) have been far more volatile, dipping into negative territory twice since 1993, in 2008/2009 and again at the end of 2010 and the start of 2011.
The peak period for capital returns since 1993 was the first quarter of 2004, when they hit 20.5% on an annualised basis.
In the Auckland residential property market, net rental income returns have also declined steadily but at a faster pace, falling from 5.7% in 1993 to 2.6% in the third quarter of this year, which means they have more than halved over that period.
As with the national figures, capital returns in Auckland have been more volatile, starting off at 10.7% a year in 1993 and then going through several periods of substantial rises and falls to end up at an annualised 22.7% in the third quarter of this year (see table below).
Adding the income and capital returns together produces a total return figure.
Nationally this peaked at 24.8% per annum in the first quarter of 2004, when the income return was 4.3% and the capital return was 20.5%.
In Auckland, total returns peaked in the second quarter of 1996, when they hit a massive 31.1% pa, made up of a 5% income return and a 26.1% capital gain.
Their lowest point was in the year to September 2008, when they briefly fell into negative territory when income returns of 3.7% were more than wiped out by a capital decline of -5.3%, giving a total return of -1.7%.
The trends show that residential property investors have been prepared to accept ever diminishing rental returns for more than 20 years and that movements in prices can have a far bigger impact on the performance of property investments than movements in average rents.
*Pre-tax net rental income is based on 75% of a property’s annual rent, to allow for outgoings such as rates, insurance and maintenance which residential landlords usually pay, but not mortgage payments.
27 Comments
Any suggestions for other places to put ones capital outside property? Something that provides a return to reinvest covering inflation and a return above that to live off? Obviously banks don't provide adequate returns and if one doesn't know about anything outside property shares are intimidating, but presumably worth investigating?
It really depends on how much risk you want to take. In reality, yields are very low across all asset classes at the moment, so chasing a certain yield to meet living costs may imply taking more risk on your capital than is prudent. Arguably, the risk free asset class for reitrees are inflation indexed government bonds. At the moment you can lock in a real return (after inflation) of 2.6% p.a. for 20 years on these if you hold to maturity. So no easy solutions here. Best advice is to seek professional and independent advice.
if you like to invest in property
try commercial or retail property, a lot better returns, cheaper to buy and steady funds.
takes some learning but a couple of really good management firms out there if you need help if you want to buy.
otherwise plenty of property shares that specialise in the same, my view pick the internal management ones
example
52 Week Change:▲$0.31 / 17.053% Gross Div Yield 8.162%
52 Week Change ▲$0.229 / 19.776% Gross Div Yield 4.975%
52 Week Change:▲$0.16 / 11.661% Gross Div Yield 5.716%
These tables are so much better than the brash daily headlines, overstating huge surge in property prices or imminent crashes. Over the last 22 years there was 1 year where average house prices dropped (by less than 2%), hardly a crash, and the old adage that house prices roughly double every 10 years holds true in your tables. Which means avg compound annual increase of 7.1% (so I've answered my own previous question lol)
good graphs, I take it they are gross returns, so for Auckland would be pretty close to negative cashflow now unless you have a high equity not to count the hours one must put into looking after them, so without capital gains would not be worth doing.
can now see why the Nats don't want to touch GC, they would then have to come up with a plan to house the people that can not buy
It's been obvious for a while that property without capital gains is financially pointless in Auckland.
Anyone purchasing property in Auckland is therefore certainly counting on a capital gain and so is a speculator, and by extension should be liable for CG tax under existing law.
The only question is why it's not being enforced properly and why every other tax payer is subsidizing the free loaders.
It's only a paper gain if you don't sell. 2.35% rental yield is basically hitting any property owner in the head with a big SELL sign - I really am bemused by the number of people that are missing this and letting the amazing opportunity they are faced with pass them by. Human nature is really fascinating sometimes.
Are you saying investors sitting on large paper capital gains should sell all or some of their portfolio rjn. Some would of course be facing depreciation recovered and other IRD issues so would not be keen to do that. I think Auckland property will drop to some level and then go up again. Picking the bottom is hard and generally you need to see it go up a little before you buy. Looking forward to hearing about November from next week when B and T give us their figures. My family in Auckland have a bob each way. One holding off buying and one trying to sell.
Sounds like your family have both bob the same way ;) (and the right way IMO). Everyone's situation is different, but the way I see it, current prices are not sustainable and while nobody knows for sure what will happen, if you sell now and lock in your gains, you have either a) made a tremendous amount of money and the market drops, or b) made a tremendous amount of money and the market doesn't drop (goes up or sideways) - in both instances, your capital is protected (depending on what you do with it, of course). For me, on the balance of risks and benefits, I'd have to lean towards locking in the profit (and have done). People need to stop treating housing stock as if it's any different to any other stock - it is subject to the same overarching financial laws of the jungle.
My Landlord (who is a friend) has owned the property for close to 20 years, I'm picking he would be getting a 15% return on what he paid for it. 5 years ago it was a home or invest it in a fledgling business for me. I went the business, sure I dont own property, but I have built something that is giving really good returns, supporting my family and my employees families. I think I made the right choice, but I think about that paper gain every day.... or not.
Until two months or so ago my nephew was thinking about the paper gains he was missing out on and it was keeping him awake at night. And it was not for lack of trying to buy. Now he is holding off as he says it has changed and the agents are showing signs of fear. They are no longer in control like they were. He has a large deposit and enough income to service a loan but is now going to see where the market goes. It might save him borrowing tens of thousands that he does not have to borrow and service. I am surprised there are people buying in Auckland currently as there is some evidence of a change in mood.
Lots of comments of the "paper value" of assets. The values of all kinds of things are gauged in paper (present estimated values). However if you sell any asset you're only left with cash. Cash is only paper and (thanks to money printing all over the world) it's value is dropping like a stone against some big asset classes like property. Money is supposed to be a store of value. At the moment cash hardly seems to qualify. Perhaps property is the new money? Where can one safely park their real wealth?
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