Rental yields have increased over the last year, but they are not high enough to be a lure for people thinking of buying an investment property, experts say.

CoreLogic's latest Housing Chart Pack shows the average gross national yield was 3.1% in June, up from a trough of 2.6% throughout much of last year. It was now at the highest level since February 2021.

A gross yield is the measure of rental income a property generates against its purchase price, but it does not take into account any costs, such as tax, insurance or maintenance.

At the same time, new figures from Bayleys put the average estimated pre-tax net rental yield at 3.3% nationally in March, up from 2.8% at the same time last year.

Bayley’s net yield figure is rental income minus outgoings against the estimated value of the property, but it is calculated before interest and tax.

Yields had been particularly low over recent years, as rents did not keep pace with skyrocketing house prices. That made it harder to find property investments with attractive rental returns.

CoreLogic chief property economist Kelvin Davidson said the improvement in yields was largely due to the fall in house prices, but rising rents had contributed a bit.

With house prices unlikely to surge again in the near term, and scope for rents to go up further due to strong demand and tight supply, it was likely yields would continue to increase, he said.

Falling house prices and rising rents mean rental yields have increased.“That could make buying an investment property more attractive to some buyers, but 3.1% is still pretty low, particularly compared to term deposits which are currently around 5.5%.”

The speed of recent mortgage rate increases, and the gap over and above rental yields, even after their modest rise, brought into question the appeal of property investment, he said.

“Most properties are probably going to be cash flow negative at the start, and for a while.

“And the tops-ups required are hard cash each week, of several hundred dollars in many cases, and that is versus the uncertain payoff of some sort of capital gain down the track.”

He had done a comparison of gross rental yields, at 3.1%, versus mortgage rates, which were 7.1% for a standard two-year fix, and it showed that negative spread of 4% was the largest since late 2008.

Davidson said if National won the election and reinstated interest deductibility it might help, because not being able to offset mortgage interest against rental income increased costs for investors considerably.

But it would be an exaggeration to say the return of deductibility would totally change the game, especially if the Reserve Bank did introduce debt-to-income ratios next year as expected, he said.

“On some simple numbers, yes it helps, because your tax bill might be $5000 less per year.

“But the gap between yields and rates wouldn’t change, and that is the main reason why large top-ups are required at present – for existing properties and new builds.”

Any potential investor needed to do their sums carefully, as it was lower mortgage rates rather than tax changes that would tend to kick-start investment demand again, he said.

Rental yields may up, but they are still pretty low, CoreLogic chief property economist Kelvin Davidson says.

“Tax changes might drive bigger capital gains, but when rates do start to fall, there is every chance their impact will be dampened by DTIs.”

Yields have been higher in the past, but not by much. In a CoreLogic chart going back to 2009, the national gross yield hovered around the 4% mark at best.

Bayleys head of insights Chris Farhi said the average national pre-tax and pre-finance net yield was now at the level seen in 2020, but back in the early 2000s it was just above 5.0%.

Finance and tax situations varied from investor to investor, but generally post-tax returns would now be lower due to the changes to interest deductibility, he said.

“It makes a difference for people thinking of buying a rental property. Higher interest rates and removal of tax deductibility has led to fewer investors in ‘buy’ mode compared with say five years ago.”

New build homes are exempt from the new interest deductibility rules.

But agents were seeing more investors looking at new build homes because of their more favourable tax treatment, which improved their post-tax return compared to existing homes, he said.

It is possible to deduct interest on new builds which received their code of compliance certificate after March 27, 2020 for 20 years from when the certificate was issued.

“Also, a growing proportion of new builds are townhouses or apartments, and have more intensive designs which enable higher rents compared to the value of the property,” he said.

“This is likely because renters are focused on issues like bedroom counts and modern design, and are less fussed on things like the size of the land.”

Bayleys’ average net yield estimates across the country were 3.2% for houses, and 3.6% for apartments and townhouses.

Farhi expected the tight supply of rental properties and the surge in migration, alongside the smaller pipeline of new housing, would continue to fuel rental growth.

But most commentators were picking that prices would stabilise or rise over the second half of this year, so yields might remain reasonably stable because higher rents might be offset by higher prices, he said.

“That said, both factors are good for investors who already own or are buying now, because they are likely to see rising rents and/or growth in prices.”

On a regional basis, estimated net rental yields were highest on the West Coast, at 5.6%, and lowest in Auckland at 2.9%, Bayleys’ figures showed.

Source: Stuff

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