By Greg Ninness

Falling house prices in Auckland made residential property a slightly more attractive investment option in the six months to March, according to interest.co.nz's latest Rental Yield Indicator figures.

The Indicator compares the gross rental yields that would be achieved in 56 locations around the country where there is a high level of rental activity, if a property was purchased at the REINZ's lower quartile selling price for three bedroom houses in each area, and rented out at the median rent for three bedroom houses in the same area.

A rental yield is the total rental income a property could earn in a year expressed as a percentage of its purchase price, and provides a standardised comparison of the relative income earning potential of rental properties in different locations.

Of the 10 Auckland suburbs monitored by the Indicator, the indicative yields in the six months to March were up in six areas, unchanged in three and down in one, compared to the six months to December (see table below).

The rise in yields was mainly caused by falling prices, with the lower quartile selling prices in eight of the 10 Auckland suburbs monitored falling in the six months to March compared to the six months to December.

The biggest fall in the lower quartile price was in Torbay on the North Shore, where it dropped by $31,000, from $830,000 in the six months to December to $799,000 in the six months to March.

In the other seven Auckland suburbs where prices fell, the declines ranged from $1000 in Beachhaven/Birkdale to $19,500 in Henderson.

The two suburbs where lower quartile prices increased were Pukekohe/Tuakau +$12,175 and Avondale +$26,250.

Over the same period, the median weekly rents increased in five of the 10 Auckland suburbs monitored, were unchanged in four and declined in one, compared to the six months to December.

So the general trend was that lower quartile prices overall were falling while rents were rising or flat, and that pushed up the gross rental yields, suggesting that buying an investment property in Auckland had become slightly more attractive in the first quarter of this year.

However rental yields in Auckland are still extremely low, with indicative Auckland yields in the Indicator ranging from 3.5% at Highland Park in the eastern suburbs to 4.6% in Pukekohe/Tuakau.

A general downturn

The combination of low rental yields, gradually rising mortgage interest rates, mortgage lending restrictions for investors and the potential absence of capital gains, have all contributed to a general downturn in investor activity in Auckland’s residential property market.

A similar trend is starting to emerge in the Waikato and Bay of Plenty, with lower quartile prices falling in parts of Hamilton and Tauranga, while median rents were either rising or static.

Around the rest of the country, things are different.

Rental yields are generally still higher in areas outside of the upper North Island, making them more attractive to investors, although they are falling back.

The decline in yields in areas outside of the upper North Island is largely being driven by continuing rises in lower quartile prices, with prices rising particularly strongly in the Wellington region.

Lower quartile prices have risen strongly in seven of the nine Wellington suburbs monitored by the Indicator, with exceptionally big rises on the Kapiti Coast and the Hutt Valley.

The biggest increase was in Waikanae/Otaki, where the lower quartile price in the six months to March was up a whopping $46,125 compared to the six months to December last year, while in in Paraparaumu/Raumati it was up by $37,625 over the same period.

There were also very strong prices rises in Lower Hutt and Wainuiomata, where the increases in the lower quartile prices in the suburbs monitored by the Indicator ranged from $28,250 to $34,300 between the six months to December last year and the six months to March this year.

Wellington yields down

However the big rises in Wellington prices have also sharply reduced yields in the region.

In the six months to March last year, the yields in the Wellington suburbs monitored by the Indicator ranged from 5.4% to 7.7%. In the six months to March this year they ranged from 4.2% to 5.9%, suggesting that the fundamentals for buying an investment property in Wellington were substantially less attractive now than they were 12 months ago.