HOME SWEET HOME? The attraction of rental investments is building.

Today the Sunday Star-Times launches a new tool to help residential property investors. The Sunday Star-Times Residential Yield Monitor will provide investors with a yield benchmark for 38 locations throughout the country, from Whangarei to Invercargill.

Yield is the amount a year's rent would provide to an investor expressed as a percentage of the property's purchase price or valuation.

The Monitor will be published monthly to help investors understand how movements in rents and property prices in particular areas are affecting the attractiveness of residential property as an investment.

Using a yield figure also allows investors to compare the returns they could get from a property against those provided by other types of investments, such as shares or bank deposits.

The Sunday Star-Times will also publish an accompanying commentary each month (see below) which explains the reasons for any significant movements.

Several factors can influence a movement in yields, for example, a rise could be caused by rents rising faster than property values, suggesting it may be a good time to buy an investment property.

The yield figure is based on the REINZ's median selling price for each area and the median rents for one, two, three and four-bedroom properties which are let in the corresponding area. The median rents are calculated according to the number of each type of property rented that month, to produce a weighted average.

Because the sales price figures are collected at the time a sale and purchase agreement becomes unconditional, and the rental figures are collated when bonds are forwarded to the Department of Building and Housing, the yield figures in the Monitor should respond quickly to changes in property prices or rents in each area, making it a leading edge indicator of movements in the market.

The Monitor records gross yields, which make no allowance for the effect of tax and vacancy levels on investment returns, or expenses such as rates, insurance, maintenance and finance costs, which investors must factor in to their calculations.

RENTALS REGAIN ROSY GLOW

Residential property is once again starting to look attractive to investors, as yields rise and interest rates remain low.

The Sunday Star-Times Residential Yield Monitor, published for the first time today, compares indicative yields (the gross investment return provided by a property's annual rental income) in 38 areas of the country where there is significant rental activity.

The monitor compares the yields achieved last month with those at the height of the last property boom, in August 2006.

It shows that yields have improved in 31 of those areas, declined in six and stayed the same in one.

Some of the strongest yield growth was in provincial cities such as Rotorua, where the yield increased from 4.7% to 6.1%, although good gains were also posted in many parts of Auckland and Wellington.

In Christchurch, the picture was a mixed bag due to the effect the earthquakes have had on the city's property market. Yields were down in some areas, such as the central city suburbs referred to as "inside the four avenues", but up in quake-ravaged Sydenham.

The main driver of improving yields over the past five years has been that rents have risen faster than property prices.

According to the Real Estate Institute, median dwelling prices increased by 14.5% between August 2006 and August 2011 while median rents increased by between 15% and 22.2% over the same period (see chart).

As well as the rise in yields, investors will have benefitted hugely from the dramatic fall in mortgage interest rates over the past five years.

In August 2006, floating mortgage rates were about 9.55% and two-year fixed rates were around 8.2%.

Last week floating rates were about 5.7% and two-year fixed rates about 6.3%.

For an investor with a $200,000 interest-only mortgage, a reduction in the interest rate from 8.2% to 5.7% would reduce their repayments by $411 a month.

Against that, investors have been facing higher rates and insurance costs and many are also likely to take a hit from new tax rules around depreciation.

Lower interest rates and higher yields also made property look relatively more attractive as an investment option when compared with term deposits.

Auckland Property Investors' Association president David Whitburn said many investors who had sat on the sidelines of the residential property market during the recession were now showing renewed interest in the market, attracted by the rising yields.

Many had been holding off in anticipation of the Reserve Bank raising interest rates but that had not eventuated, he said.

- Sunday Star Times