New Zealand Investment Property

30 May 2009

Source: The Dominion Post

Rental properties could be making a comeback after an oversupply last year caused rents to fall.

The market was hit by the “accidental landlord” syndrome, with a jump in the number of people taking houses off the market and renting them out after property prices plunged.

Since then, Massey University’s March survey shows that rents have largely returned to where they were a year ago, with the national average at $300 a week.

Massey says New Zealand does not keep a record of vacancy rates, which makes it hard to tell just how big the glut still is. “Countries that do have vacancy data tend to find vacancies start to go up during recessions as families double up to save money.”

But property information firm Quotable Value believes that the falls in interest rates and property prices make now a good time to buy a rental property.

It estimates that rental yields since 2007 have been creeping up to 4.9 per cent a year.

It even lists about 42 suburbs throughout New Zealand which are “cashflow-positive” meaning a property’s income is more than the mortgage, rates and other outgoings.

“With vacancy rates dropping, positive rental growth and value growth being minimal, it is anticipated that more and more properties will be moving into cashflow-positive territory.”

Nevertheless, experts warn that it’s not a market for those hoping for big capital gains or big rental increases at least not in this economically uncertain climate.

“We don’t know what’s happening to people’s behaviour and we don’t know really what’s going to happen to employment,” says Larry Murphy, professor of property at Auckland University.

He says at least two possible scenarios could unfold. In one, landlords would push up rents because they were making less money from capital gains. In the other, highly geared landlords would be forced to offload properties, increasing the downward pressure on property prices at the lower end.

Professor Murphy says that although QV’s optimism is fair for those considering buying an investment property, it can be a different story for those who have been a landlord for a couple of years. They may have negative equity or are caught up in static rentals. “They might be under pressure to possibly sell up. They’re being squeezed by capital values dropping and still having relatively high mortgages on them.”

Martin Evans, president of the Property Investors Federation, agrees that there are perils for landlords at present.

“A lot of tenants are having difficulties at the moment, and they’re different tenants to what they used to be. They used to be low-income now, it’s people losing their jobs or having their incomes reduced and they can’t afford to pay their rent.
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“Some property investors have so little equity in their property and they’re so heavily mortgaged that they can’t afford more than a couple of weeks’ rent to be missed, otherwise they’re into a mortgagee sale.”

He confirms that yields are beginning to creep back up after years of investors having to top up the mortgage.

“But in every investor’s life, that happens two or three times. It happened in 2002-03. You [could] buy a property probably then for $130,000 and you’re getting 10 per cent yield … and that’s starting to happen again.”

Last year, he says, rents went down after rising 7 per cent in the previous year. They were pushed down by slower migration, young people staying home rather than renting, and a flock of “accidental landlords” who couldn’t accept the lower valuation on their property.

This year, migration is up, and people are feeling uncertain about taking on financial commitments such as mortgages. End result: a lot of people are wanting to rent. “Even at the higher end of the market, it’s quite an active market. There are lots of people who could possibly afford to buy a house but they are renting,” Professor Murphy says.

That is likely to remain the case for a while. Mortgage rates might have dropped but the higher deposits that banks are requiring are thought to be putting off potential buyers.

Mr Evans says first home buyers aren’t the ones stimulating the market at present.

“It’s property investors getting into trouble, and it’s property investors buying those properties. Your whole activity’s generated by property investors at the moment.”

Mr Evans thinks rents will rise, but it will take time. With property developments getting put on the back burner, a shortage of housing is expected to emerge as early as next year. One study forecasts that the number of renter households will increase by 30 per cent between 2006 and 2016, due in part to falling house affordability.

But “you’ve got to fill the vacant properties first”, Mr Evans says. Properties are taking some time to rent, with the cheapest two-bedroom flat in Christchurch renting for $160 a week compared with $195 last year.

In the next six months, QV expects property values to continue to decline or flatten, setting the scene for an improving ratio of prices to rents.

From 2004 to 2007, rental yields were eroded as house prices grew faster than rental rates. But since early 2007, that trend has been inverting, with yields now an average 4.9 per cent as property values fell 9.2 per cent for the year to April, the first sustained fall in 10 years.

Add on the attractive interest rates and, QV believes, “the current conditions are creating a market where positive-cashflow properties are now becoming more common”.

Some of the best-performing suburbs are Ravensbourne and Port Chalmers in Dunedin, North Dunedin, and Harbourside, Newton and Grafton in Auckland. In Wellington, Porirua East and Waitangirua were earning a gross yield of 7.5 per cent for a house, and Petone West and Alicetown were gaining 7.7 per cent for a unit.

IN THE BLACK: Quotable Value judges cashflow-positive suburbs according to whether they have recorded enough sales to give a reliable median sale price. It allows $1000 for legal fees and other costs; an interest rate of 5.79 per cent; a buyer’s deposit of at least 20 per cent; and miscellaneous costs such as rates and management fees of 1 per cent of the purchase price.

New Zealand Investment Property