How are interest rates affecting property owners?

Record low interest rates in New Zealand have decreased the total cost of rental property ownership for landlords, balancing out the declining gross yields in Auckland.

Gross yield in Auckland declining

Our data shows that gross yield on the average three bedroom property has dropped from 3.73% to 3.13% over the past two years.

While the average rent in Auckland has increased from $464 to $510 over the same period (a 10% rise), this growth has not kept pace with the constant and steeper increase in Auckland property prices, which have risen 31% over the same period, thus causing the gross yield to decline.

Chart showing gross yield vs average sale price of a 3-bedroom property in Auckland

Interest rates and net yield

During this same period, two-year fixed interest rates have dropped by 27%, and one-year rates by 23%. This has the effect of decreasing the total cost of ownership of a rental property (the net yield).

Chart showing gross yield vs one year fixed interest rate and average sale price (3-bed property)

Net yield and real cost of property ownership

While we use gross yield as a way to measure growth each month (it's an easy figure to calculate), savvy investors know that the net yield or 'rate of return' is an important yardstick with which to evaluate potential investments - and not just property. Net yield is the income return on your investment after expenses and outgoings are taken out, and represents the 'true cost' of your investment.

To calculate net yield, you take the annual rental income of a property, subtract the annual expenses or loss of rental income, then divide this figure by the 'property value', and multiply this by 100. 

Here's an example:

Property value $600,000, expected rent $500 a week and expenses/loss $5000.

$26,000 ($500 x 52 weeks) - annual rental income
- $5000 (annual expenses/loss) - this could include repairs and maintenance, management fees, etc
รท $600,000 (property value) 
x 100 
Yield = 3.5%

You may also want to factor in a 4% vacancy rate per year (roughly two weeks), for example where you may be in between tenants. In this case, calculate your annual rental income over 50 weeks rather than 52 weeks.

Lower mortgage repayments improve net yields

As interest rates go down, so do associated annual expenses - i.e. your mortgage repayments - improving net yield and making those potential investments more tenable.

Chart showing estimated mortgage payments per annum vs two year fixed interest rates

Trend towards renting - demand for rental properties to increase?

According to data from Statistics New Zealand (Dwelling and household trends: 1991-2015)*, 32% of households in New Zealand now rent their property, and just 64% of households are owner-occupiers.

What's interesting, is that the proportion who rent has increased by 39% since 1991 (when 23% of households said they rented their dwelling). In contrast, owner-occupiers decreased by 14%, down from 74% in 1991.

If this trend continues, it is clear that demand for rental properties will remain strong. Whether this improves rental price growth (and increases yields), remains to be seen.

*Data from Dwelling and household trends: 1991-2015

More information

Read more about how to understand return on investment, get more helpful tips and advice, or read our latest market reports.

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