The latest quarterly investor confidence survey from ASB Bank confirmed that rental property is again the top investment that people felt would give them the best return. This is the first time that rental property has been at the top of the list for over two years.
Nineteen per cent of surveyed investors believed rental property offered the best returns, which was up from 14% in the last quarter.
Looking at the numbers it is easy to see why popularity for rental property is returning. Rental yields have been increasing in most areas of New Zealand and combining this with low interest rates, rental cashflows have been excellent.
Using the latest real Estate Institute sales and rental figures, the average valued house in New Zealand with a 10% deposit would more or less break even on a cashflow basis from the day it was rented out.
Through canny buying and putting in a little fix-up effort, it is entirely feasible to buy cashflow positive rental property at present.
This is not news to many Property Investor Association members across New Zealand who have been actively acquiring rental property over the last two years. What is interesting is that non experienced or potential rental property owners are starting to wake up to the fact that property is stacking up.
Chief executive of the Real Estate Institute, Helen O'Sullivan, said the people currently investing in property were mostly habitual investors, not newbies. She was quoted as saying that "they are still very rational purchasers, investors. They don't fall in love – they do the numbers. They were investing in property for cashflow, not looking at capital gain."
This is the difference between the experienced and new investor. The new investor has not yet entered the market in large numbers, but the ASB’s survey indicates that they may be on the verge of doing so.
This is another good sign for the property market. It is a further indicator that the property cycle is moving closer to the next upward movement. Just how strong that upward movement will be is not yet clear, but it is unlikely to be at the levels we saw between 2002 and 2007.
Most economies in the world are still fragile following the GFC and many people are still in a financial defence mode rather than an investment mode. Paying down debt has probably been the number one investment strategy for many people of the last few years. After the heavy capital losses experienced by many people through financial institutions, protecting capital has been a bigger driver for many rather than looking to increase their capital.
Despite the large number of people believing that rental property is currently the best investment strategy, this will not necessarily lead to people actually going out and making a purchase.
Even with key indicators starting to point in the right direction and investor sentiment returning to property, it is difficult to see a rush of investment and property prices taking off at a fast rate.
This is not entirely a bad thing as it means that buying opportunities for canny investors are likely to be quite good for a while yet before the heard mentality kicks in again and competition increases.