Mortgage gaps challenge NZ property owners
Record rent increases in New Zealand are still not enough to bridge the gap between rental yields and mortgage repayments, with investors seeking additional income sources, according to CoreLogic.
Rental yields vs. mortgage rates
The CoreLogic NZ March Housing Chart Pack revealed a persistent gap between gross rental yields and mortgage rates in New Zealand's property market, the widest since 2008.
Despite a slight improvement in rental yields to 3.2% in February – the highest level since late 2020 – they remain low compared to other investment returns.
“The rise in rents means yields are creeping slightly higher, but the increase is nowhere near enough to compensate for high mortgage rates,” Kelvin Davidson (pictured above), chief property economist at CoreLogic NZ, said in a media release.
Investment dilemma
Davidson suggested that the significant financial top-ups required from other sources to cover mortgages might deter new property investors from the market.
This could lead to fewer rental properties available, potentially driving rents even higher. However, it might also reduce competition for potential homeowners.
“Fewer investors will result in less stock hitting the rental market... then again, fewer investors mean less competition,” he said.
Persistent yield gap
CoreLogic data showed that despite historical highs in rental growth, with a 6% increase in the year to January, rents still fall short of covering mortgage payments for debt-backed purchases.
“Rents are nowhere near enough to cover the mortgage for a typical debt-backed purchase in the current market, let alone other running and maintenance costs, so an investor’s cash flow needs to be supplemented from other income,” Davidson said.
He also said that these financial top-ups are expected to continue, even as tax obligations decrease with the reinstatement of mortgage interest deductions.
“In a nutshell, it remains tricky to get the sums to stack for 'Mum and Dad' investors at present,” Davidson said.
Market dynamics
The CoreLogic report also pointed to a growing number of new listings in February, suggesting more choices for buyers which may ease near-term price pressures. Sales volumes have shown an uptick, 19% higher than the previous year, indicating a continued, albeit slow, market recovery.
Davidson characterised the country’s property market recovery as underwhelming and “patchy,” predicting that these subdued conditions are likely to persist into 2024 due to high mortgage rates.
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