Numbers ‘not adding up’ for New Zealand investors

Despite rising rents in New Zealand, investor yields are lagging behind mortgage repayments, forcing Mum and Dad investors to reach into their own pockets to make up the shortfall.

The CoreLogic NZ March Housing Chart Pack found that the disparity between gross rental yields and mortgage rates is at the widest level since 2008.

Gross rental yields nationally increased to 3.2 per cent in February and are at the highest level since late 2020, having improved from a trough of 2.6 per cent in 2022.

CoreLogic NZ Chief Property Economist Kelvin Davidson said even with the increase, yields were relatively low by historical standards and were less than the income returns on other asset classes such as term deposits.

“The rise in rents means yields are creeping slightly higher, but the increase is nowhere near enough to compensate for high mortgage rates,” Mr Davidson said. 

“Our measure of yields, which is based on average property values and rents, might not necessarily represent the actual experience of all investors, especially existing owners who have held for many years. 

“But the big-picture conclusions still hold.”

Mr Davidson said the negative cash flow that investors faced might mean new buyers were likely to remain on the sidelines.

“Fewer investors will result in less stock hitting the rental market than there otherwise might have been, which only adds upwards pressure on rents,” he said. 

“Then again, in principle, fewer investors mean less competition and an opportunity for those renters who can save a deposit to possibly buy their own home. 

“Certainly, our Buyer Classification data is showing first home buyers remain active.” 

According to Mr Davidson, rents increased 6 per cent in the year to January, a growth rate that’s almost twice the long-term average of 3.2 per cent. 

“Rents are nowhere near enough to cover the mortgage for a typical debt-backed purchase in the current market, let alone other running and maintenance costs, so an investor’s cash flow needs to be supplemented from other income,” he said. 

He said the top-ups would typically remain in play even after tax bills have declined due to the reinstatement of mortgage interest deductions. 

“In a nutshell, it remains tricky to get the sums to stack for ‘Mum and Dad’ investors at present,” he said.

CoreLogic also found that buyers had more choice with the number of new listings increasing in February, after the traditional holiday slowdown. 

Sales volumes were also about 19 per cent higher than the same month last year and marked the 10th consecutive monthly increase – but it’s from a low base. 

Over the past year, there have been 69,248 transactions, an improvement on April 2023’s trough of less than 62,000, but still well below the 10-year average of around 91,000. 

There was a 1.6 per cent increase in average property values across New Zealand in the three months to February, on an annual basis however values fell 1.4 per cent – marking the smallest annual drop since October 2022 (down 0.6 per cent).

Property values in the country’s main urban centres and regional areas were all in positive territory in the three months to February.

Tauranga was the strongest performing city area, with average property values increasing 2.7 per cent in the three months to February, while within Auckland, Manukau saw a 3.5 per cent rise. 

Mr Davidson described the outlook for the country’s property recovery as underwhelming and ‘patchy’, with these muted conditions expected to continue in 2024, given mortgage rates remain high.

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.