The improving outlook for buyers of rental properties
There’s been a lot happening in the residential property market in recent months, resulting in a shuffling of the deck of multiple factors which shape the market.
An analysis of this year’s major headlines points to a clear trend: the environment is improving for investors in rental properties.
That’s the view of the Bayleys Research team, who have concluded that significant tailwinds have now swung in behind existing and would-be landlords.
They point to several factors. The Government’s rejection of a capital gains tax on property removed uncertainty which had hung over the market since before the 2017 election. Investors can now make purchases in the sure knowledge that any capital gains they make will not be taxed, so long as they hold on to the property for the five years stipulated in the Government’s ‘bright line’ rules.
The Reserve Bank’s decision to cut the official cash rate (OCR), a key influence on bank lending rates, to a record-low 1.5 percent has added further fuel, with a real possibility we’ll see further cuts.
A falling OCR has a dual impact on existing investors and those considering purchasing a property. Firstly, it has seen major lenders trim their mortgage rates, which will reduce mortgage repayments. With major banks now advertising rates of just over 4 percent for a three-year fixed mortgage, rates have fallen some 90 basis points in a year, carving more than $3,600 off the annual repayments for a $600,000 loan.
A lower OCR has also led to cuts to deposit rates, meaning there’s less to be gained from having money in the bank. Many savers will now be looking for investment options where they can get higher returns, and residential property is looking better and better as a place to invest their funds.
In the Auckland market, home values have more-or-less been in a holding pattern for two or three years now, while wages have gradually increased. As a result, the affordability equation is improving.
At the same time, the high numbers of immigrants choosing to make New Zealand their home means the demand for a place to live remains strong – particularly in our largest city, with Auckland traditionally attracting over half of the net migrant flow.
Recent figures from Statistics New Zealand – while a bit volatile after changes to how they’re calculated – point to net migration of 56,000 in the year to March, well ahead of the 10-year average of around 32,000. A fast-growing population is expanding the pool of tenants at a time when demand for property continues to run ahead of the supply of new homes being built.
RENTS ON THE RISE
Meanwhile, the rents paid by tenants have been rising, with the national median hitting a record $500 per week in April, according to Trade Me. The median in the Auckland region was $560.
Statistics New Zealand figures showed a 4.4 percent rise in national rents in the year to April, with rents in Auckland up 2.4 percent.
Combined with steady property values, the lift in rents has seen an upward trend in gross rental returns
– a measure of rental income as a percentage of a property’s value. The median figure for the Auckland region came in at 3.6 percent in the March quarter, up from 3.2 percent in late 2016.
This compares well with the interest on offer from having your money in a term deposit – which will have many savers considering their options, particularly when rental returns are only part of the property investment picture.
Treasury, in its pre-budget forecasts, said it expected average annual growth of 4 to 4.5 percent in property values nationwide over the next four years. If Treasury’s outlook is on the money then things look good for the “total return” generated by an investment in residential property.
MAPPING THE OPPORTUNITIES
Overall values in Auckland have been steady for a couple of years, after several years of rapid rises. But, as anyone experienced in buying and selling property will know, market-wide figures never tell the full story.
Returns can vary from suburb to suburb, and even street to street. A number of locations, particularly parts of South Auckland and Rodney, continue to generate capital gains of up to 5 percent, driven largely by local affordability, according to CoreLogic data.
As a general rule, rental returns rise as you move further from the city centre, given that property values tend to reduce.
For example, the median gross rental return on a Remuera property was 2.4 percent over the six months to April. In Henderson, the figure was 3.5 percent and in Pukekohe 3.8 percent.
Bucking the distance-from-CBD trend are, ironically, central-city apartments, where the median return steps up to 5.5 percent. As with the suburbs with higher returns, apartments have traditionally produced better rental returns due to their more affordable entry price.
The trade-off is that while, in percentage terms, CBD apartments have matched Remuera for capital returns at around 40 percent over the past five years, the dollar-value gain was much smaller. The median value for CBD apartments rose $116,000 over five years, compared with a $495,000 lift in Remuera.
The picture is quite different outside Auckland, where investors are seeking more affordable investments in a number of regional centres. Many cities have continued to see significant capital growth.
In Whangarei, where the median weekly rent is $406 (up 6.8 percent in a year) and the median home value sits at a relatively inexpensive $466,000, the numbers stack up impressively for rentals. With a gross rental return of 4.5 percent and capital returns of 13 percent, the city is sure to attract keen interest, which will be further boosted by the wider improvements in the environment for investors.
It's fair to say that it’s not all one way traffic for those seeking to rent out residential property. Upcoming “ringfencing” rules will remove a significant tax advantage for investors making rental property losses. Proposed bank capital requirements could counteract falling mortgage rates, while new insulation and healthy-home standards will add to costs for landlords.
But, when all is considered, the complex soup of factors that shape the market is proving increasingly tasty for those considering an investment in residential property.
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