tmmonline.nz  |   landlords.co.nz        About Good Returns  |  Advertise  |  Contact Us  |  Terms & Conditions  |  RSS Feeds

NZ's Financial Adviser News Centre

GR Logo
Last Article Uploaded: Saturday, July 2nd, 1:15PM

News

rss
Latest Headlines

Landlords should be focusing on higher yields

Over the next few years, capital gains will be harder to come by for property investors, which means the “nuts and bolts” of being a landlord are likely to become more important.

Monday, June 13th 2022, 10:40AM 1 Comment

by Sally Lindsay

These include a focus on cost control, rents increases, and, most importantly, buying properties with the highest yields - for the lowest risk.

Some of the key drivers of returns in recent years, for example, strong capital gains and positive monthly cashflow, especially over 2020-21, have been dramatically reduced, and the economics of investment look likely to be trickier over the next few years.

Average property values are now falling steadily, and if the 2008-09 financial crisis is anything to go by, even after the market has reached the bottom, it could be a number of years until it regains the recent house price peak. In other words, the next four to five years could be a quiet time for capital gains.

In its latest Market Pulse, CoreLogic’s chief property economist Kelvin Davidson says in this environment, it will be no surprise to see investors focusing on yield - trying to buy properties that have the highest rent in relation to their purchase price, albeit still within the investor’s tolerance for risk.

So, where can landlords find yields and property types which are the most appealing?

The national average gross property yield is now just 2.6%, versus the average standard two-year fixed mortgage rate of 5.6%.

The negative yield gap of -3% is the biggest since mid-2010, or in other words the least favourable position for property yields versus mortgage costs for more than a decade, after a period in 2020-21 when it was beneficial for investors.

It’s also worth noting term deposit rates for durations of at least a year are now generally back at 3% or more, and flows of money into term deposits have started to pick up again after previous outflows.

Davidson has drilled down to property type and location.

Starting with apartments - and a minimum threshold for number of properties - Davidson says for a fairly typical two-bedroom property there are still a few areas with gross yields of at least 4.5% – such as Auckland’s Newton/Grafton and central west, and Wadestown/Thorndon in Wellington, says Davidson. 

For two bedroom flats, for example, some parts of Christchurch still have yields of at least 4%. Then in the biggest category – three bedroom houses – again yields of 4% or more are still conceivable in parts of the main centres, e.g. Christchurch and Dunedin, as well as Gisborne and Whanganui amongst the next tier of towns/cities.

He says new-builds are clearly an option, given the ability to keep claiming mortgage interest deductions from tax, as well as their exemption from the 40% deposit requirement under the loan to value ratio rules.

Davidson says at the other end of the spectrum, there are some low yields in the market. For example, three-bedroom houses are below 2% around a number of Auckland suburbs, such as Remuera, Westmere/Surrey Crescent, St Heliers/Glendowie, and Grey Lynn/Arch Hill, all at 1.7%.

“However, there are always likely to be ‘bargains’ for investors in any market conditions, especially if they get a discounted purchase price or are skilled in renovations, as examples.

“Many investors will tell you that in fact a downturn is the best time to be buying. And no doubt would-be investors will be breathing a little easier on the back of the Reserve Bank’s decision to push out any formal caps on debt to income ratios until at least mid-2023, and even then only if required.”

More costly

It’s obviously become more complicated and costlier to be a landlord, given changes such as Healthy Homes legislation and the extra difficulty in removing a troublesome tenant.

On top of that, says Davidson, mortgage rates have risen sharply, and although an interest-only loan can reduce the servicing payments for the first year or two, clearly no principle is being paid off, and the property may well require a top-up out of other income anyway.

“To be fair, one silver lining from an investor’s perspective is that rents continue to rise at around 6-7% annually, double the long-term pace. But given that tenants’ wages ultimately cap how much they can afford to pay, there’s a limit to how long such rapid rates of rental growth can last.

Market share

CoreLogic’s Buyer Classification data shows mortgaged multiple property owners, typically a genuine investor, have seen their market share of purchases fall over the past year, but at 23-24% they haven’t abandoned property altogether.

Similarly, there are no real signs of existing investors selling properties at a faster rate, with the bright-line test potentially a limiting factor, but also those that have been in the market a while tend to have smaller mortgages and therefore be less affected by higher interest rates.

Of course, for existing landlords who have held property for longer, the pressure will be less acute.

“It still wouldn’t be the biggest surprise if a few more listings come through from existing investors, if they’re outside their Brightline period, in the medium term.

“After all, hanging in for long-term capital gains is one thing, but sustaining cash losses on a yearly basis in the meantime may not be palatable for some investors for too long – especially given the loss ring-fencing rules too."

Tags: landlords

« Illegal car removals costs landlord thousands of dollars

Special Offers

Comments from our readers

On 14 June 2022 at 9:24 pm Gregory Young said:
It is time for investors to look for cheaper property management options as part of their cost cutting efforts. A very affordable option for those with properties in Hamilton and Tauranga without sacrificing on service levels is available. Check out www.athomepropertymanagemnt.co.nz

Sign In to add your comment

 

print

Printable version  

print

Email to a friend
News Bites
Latest Comments
  • OBITUARY: Controversial adviser dies at 80
    “I knew Roger from back in our IAFP days, Roger as head of his company (a competitor to my own) and as a friend. Even after...”
    2 days ago by Winka
  • Conduct laws finally real
    “The draft FSLAA legislation was developed in the final months of the last National Government. CoFI was a natural extension...”
    2 days ago by dcwhyte
  • New Code Committee members finally revealed
    “About as much relevance as having Gordon Ramsay on the Code Committee....”
    2 days ago by Eyeinthesky
  • Conduct laws finally real
    “John just interested as to when National bankrupted the country, maybe before my time?? ...”
    2 days ago by Barbie
  • Conduct laws finally real
    “I'm not normally a Labour supporter Amused. But let's not forget, as far as I am aware, National are still the only party...”
    3 days ago by John Milner
Subscribe Now

Mortgage Rates Newsletter

Daily Weekly

Previous News
Most Commented On
Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA 5.95 4.85 5.35 5.65
ANZ 5.94 5.95 6.40 6.59
ANZ Blueprint to Build - - - -
ANZ Special - 5.35 5.80 5.99
ASB Bank 5.85 5.35 5.80 5.99
Avanti Finance 5.95 - - -
Basecorp Finance 6.95 - - -
Bluestone 5.89 7.49 8.09 8.19
BNZ - Classic - 5.35 5.69 5.99
BNZ - Mortgage One 5.94 - - -
BNZ - Rapid Repay 5.94 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Std, FlyBuys 5.94 5.95 6.29 6.59
BNZ - TotalMoney 5.94 - - -
CFML Loans 6.45 - - -
China Construction Bank 5.50 5.40 6.14 6.40
China Construction Bank Special - 4.45 5.19 5.45
Co-operative Bank - First Home Special - 4.75 - -
Co-operative Bank - Owner Occ 5.85 4.85 5.35 5.65
Co-operative Bank - Standard 5.85 5.35 5.85 6.15
Credit Union Auckland 5.95 - - -
First Credit Union Special 5.85 ▲5.35 ▲5.85 -
Heartland Bank - Online 4.10 ▲4.90 ▲5.29 ▲5.59
Lender Flt 1yr 2yr 3yr
Heretaunga Building Society 6.10 ▲5.35 ▲5.80 -
HSBC Premier 5.89 4.39 5.15 5.39
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.25 4.39 5.09 5.45
Kainga Ora 5.43 4.57 5.58 5.85
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 5.50 ▲6.19 ▲6.69 ▲6.79
Kiwibank - Offset 5.50 - - -
Kiwibank Special 5.00 ▲5.19 ▲5.69 ▲5.89
Liberty 4.84 - - -
Lender Flt 1yr 2yr 3yr
Nelson Building Society 6.45 5.55 6.15 -
Pepper Money 4.49 - - -
Resimac 6.19 5.60 6.16 6.29
SBS Bank 5.79 ▲5.65 ▲6.09 ▲6.19
SBS Bank Special - ▲5.15 ▲5.59 ▲5.69
Select Home Loans 4.09 4.29 4.86 5.09
TSB Bank ▲6.30 ▲5.65 5.79 ▲6.45
TSB Special ▲5.50 ▲4.85 4.99 ▲5.65
Unity 5.65 4.95 5.55 -
Wairarapa Building Society 5.74 4.95 5.75 -
Westpac 5.94 5.95 6.29 6.59
Lender Flt 1yr 2yr 3yr
Westpac - Offset 5.94 - - -
Westpac Special - 5.35 5.69 5.99
Median 5.87 5.35 5.77 5.99

Last updated: 1 July 2022 9:33am

About Us  |  Advertise  |  Contact Us  |  Terms & Conditions  |  Privacy Policy  |  RSS Feeds  |  Letters  |  Archive  |  Toolbox  |  Disclaimer
 
Site by Web Developer and eyelovedesign.com