Still possible to find good returns from residential property investment, report shows

Residential property investment prospects look particularly poor, according to a new study released this week in the home loan centre of www.msn.co.nz

However, the same study found that one region, and four cities currently do provide superior returns, and that two further cities are about to move into this same ‘superior’ category.

The research, carried out by interest.co.nz and sponsored by BNZ, measures a standardised after-tax return on residential property investment, and benchmarks it against after-tax returns on bank term deposits.

It also assesses the potential capital gains from holding this class of investment.

Over the long run, the research shows that residential property investment relied on capital gains to supply good returns – and those returns were very good when that was happening. Nationally, they peaked at over 40% pa in 2006. However, the dramatic slowdown in the housing market has seen these tax-advantaged capital gains evaporate in 2008, and although they came back briefly in mid 2010, they have gone again recently.

Prospects for them returning any time soon don’t seem positive.

However for investors who are focused on operating returns, these lower house prices are opening up increasingly profitable opportunities. At first-quartile levels, Gisborne, Wanganui, Timaru and Invercargill all currently deliver returns much better than bank term deposits - and Rotorua and Dunedin look like they are about to move into the same category in the first half of 2011.

The Reports pull together all the primary influences on returns – including rents, rates, interest costs, maintenance, insurance, and depreciation – to come up with a single profit after-tax as a percentage return on the equity invested in a residential property investment. They track this monthly since January 2006.  They also track annual capital gains.

Posted: 13 Jan 2011

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