Capital gains drive investors

Property investors have been heading to Hamilton where property values are up more than 20 per cent on a year ago.

Property investors are the most active purchasing group in almost every market across the country, but particularly in Auckland.

In Auckland for the past few years investors have been chasing capital gains as property values rose 15 per cent to 20 per cent each year. The more usual measure of investor returns -- yield -- has looked a bit sick lately as value increases have far outpaced rent. In Auckland the gross yield has dropped to 2.3 per cent.

The gap between values and rent is a reason some claim Auckland is in a price bubble. Theory would have it that rent increases at the same pace as values. In the Auckland market however, where mortgages are cheap and relatively easy to get, raising funding to buy a house is a different matter to paying rent, which is funded from your income.

Wage growth has been very subdued for the past few years and that constrains tenants from paying higher rent. In Auckland City and the North Shore the average rent has increased about 6 per cent over the past year, and Manukau and Waitakere are up 3 per cent.

That's much slower than property values have increased, but still faster than wages. From a landlord's perspective it is better to have a reliable long-term tenant than try to force higher rent out of a market that can't afford it.

Recent regulatory changes aimed at slowing investor activity seem to have had only a short and limited impact. The share of sales to investors dropped briefly for a few months last year as investors stood back to let the dust settle. Once it became clear the sky hadn't fallen they jumped back into the market with gusto. The share of sales to investors has bounced back to previous levels and rising.

A few Auckland investors have also sought the greener pastures of places such as Whangarei and Hamilton. Values in Hamilton have accelerated rapidly since mid-last year and are now up more than 20 per cent a year.

Rent has increased at a far slower pace meaning yields in Hamilton have also dropped from 4.5 per cent to 3.7 per cent. Still better than Auckland but the closing yield gap may encourage Auckland investors to stay closer to home.

Many of the Auckland investors I talk to still see a positive outlook for investing in Auckland given the supply shortage and high migration. As long as they see those potential capital gains they will keep investing.