Property investment yields down, but optimism remains

One third of investors expect house prices to fall over the coming year and another third expect house prices to be flat to 2.5% over the next year. Collectively, over 70% on property investors expect house prices to decline or rise by less than 2.5%, up noticeably on last year’s total of 24%.

Cameron Bagrie, ANZ chief economist says this still looks optimistic considering the current interest rate environment, global conditions and the marked increase in real estate listings across the country. National house sales figures for March were down 52% and 56% in Auckland.

Looking further ahead, over the next five years 69% of those surveyed expect price growth between 2.5% and 10%, much the same as last year.

'The majority of investors expect weakness in the market to be a reasonably short-lived affair, which appears at odds with the historical pattern of house prices remaining flat for four years following an upward swing,' says Bagrie.

He believes that given the strength of the housing boom over the past six years and price of a typical house relative to average wage, we should not be surprised to see house prices give up some gains, thus improving affordability.

The survey also showed the majority of landlords expect solid rent increases, with 68% expecting increases from anything between 2.5% and 10% over the next year. Nearly three quarters expect rents to grow between 2.6% and 10% over the next five years.

With gross rental yields around 5% and current fixed mortgage rates hovering around 9-10%, the biggest challenge for landlords is negative net yield, particularly in a flat capital growth environment. The number of investors reporting a gross yield under 5% has increased from 51% in 2007 to 65% this year.

'Clearly landlords are under increasing cash flow stress and it’s hard to see this situation changing soon,' says Bagrie.

As expected, the survey shows intentions to buy have dropped, but a solid 39% of investors still plan to buy in the next 12 months, compared with 49% in 2007.

Similarly, investors are nervous about what changes the government might make, with 30% seeing regulation as a major risk. Changes to tax and loss attributing qualifying company (LAQC) rules was of particular concern, as was ring fencing of rental losses.