Capital gain required to justify investments

As part of its monthly Home Truths report, it has looked the rate of capital gains that an investor would require to justify buying a house.

The net rental yield on residential investment properties, once maintenance and management fees are considered, is usually less than the mortgage rate required to finance the purchase.

Westpac said: "Investors are willing to accept such low yields only because they anticipate capital gains - the kicker being that those capital gains are tax-free, whereas other investment returns are taxed."

During the early part of last decade, just 3% year-on-year capital gain was required to break even because interest rates were low and rents were relatively high compared to house prices.

But as house prices and interest rates rose, it became harder to justify investing.

During 2008, a long-term capital gain of 5.7% per annum was required to make investing pay off.

That has since dropped and now 4.4% is required, based on today's interest rates.

In September, prices had increased 4.1% year-on-year.

Westpac's economists said things could get out of step again when interest rates rose. “Should interest rates rise in the future, as we suspect they will, the required capital gain may once again rise into unrealistic territory.”