Declining rental yields are making residential investment property a less attractive option

By Greg Ninness

House prices are continuing to increase at a greater pace than rents, decreasing the potential income returns from residential property and reducing its potential attractiveness to investors, according to interest.co.nz's latest Indicative Rental Yield figures.

The figures monitor the REINZ's lower quartile selling prices for three bedroom houses in 56 locations around the country where there is substantial rental activity and match them with the median rent for three bedroom houses in the same locations.

Those figures are used to provide an indicative gross rental yield figure in each location which is updated quarterly, enabling the relative attractiveness of rental properties in those locations to be compared on an apples to apples basis and tracked over time.

Of the 56 locations monitored, the yields declined in 39 over the six months to the end of September this year, compared to the previous six months.

That means prices increased at a greater pace than rents in those locations, reducing the potential rental returns on offer.

The yields increased in 11 locations and were unchanged in six.

Some of the changes were spectacular.

In Auckland's Avondale the lower quartile price for three bedroom houses increased to $1,050,000 over the six months from April to September this year from $912,750 in the six months from October 2020 to March 2021. That's an increase of $137,250, or 15%, in six months.

Over the same period the median rent for three bedroom houses in Avondale decreased from $600 a week to $560 a week.

The combination of those factors dragged the indicative gross rental yield for Avondale down from 3.4% to 2.8%, which was the lowest yield in any of the locations monitored by interest.co.nz.

While the changes in yields weren't as spectacular in most other locations, the trend generally has been for yields to decline.

The area with the highest yield was Ashburton at 5.9%.

Of the 56 locations monitored, only eight had yields of 5% or more in the six months to October this year, compared to 14 with yields of 5% or more in the six months to March this year.

You can view the full rental yield figures for all 56 locations monitored by interest.co.nz here.

This story was originally published on Interest.co.nz and has been republished here with permission.