Is owning a rental property still worth it? Expert says the economics have changed

A university professor says several reasons are behind investors opting out of the property market.

Recent data and surveys suggest mum and dad investors were pulling back as rent stagnated, vacancies mounted and capital gains fell.

Auckland University associate professor Michael Rehm said various pressures had changed the economics of property investment.

He told Nine to Noon that for many - particularly smaller investors - relying on steady capital gains was becoming harder to sustain.

"Investors, historically, have taken up a third to up to half of purchases in a market, and that's now reduced significantly," Rehm said.

He said surveys done by economist found there was definitely a pullback from investors.

Rehm said a lot it was just outlook and expectations, and capital gains was central to making the numbers work for a small investor, but those weren't on the horizon.

"You could go all the way down to South London and probably still have some price rises, but the largest markets, Auckland, Wellington, which has its own issues, they're going backwards," he said.

"So, there's no longer capital gains. You're talking capital losses, and that really puts a lot of pressure on mom and dad investors."

Rehm said it could be drawn back to changes in the lending sector.

In particular, some regulatory changes way back at the peak of the market in December 2021, and debt-to-income limits (DTI) that the Reserve Bank put in place in mid-2024, he said.

He said DTI was the critical one, particularly 10 years ago.

"When the Reserve Bank was looking at loan-to-value ratio kind of tools versus DTIs, they ended up using LVR, loan-to-value tool mainly.

"The DTI came in late in the piece, but when they were looking at the early figures, they used a figure of five times borrower's income as a limit to how much lending you could get to go buy a house. That was considered high.

"Fast forward to recent, the limits they actually set were six for an owner-occupant and seven times for an investor, so they're already higher than what they deemed uncomfortably high a decade ago, and really what that does is it kind of tethers borrower's incomes to whatever they could borrow from the bank."

Rehm said houses prices continued to increase rapidly while incomes were "fairly flat and stable".

He said if we wanted affordability, house prices and income needed to be in alignment.

"In my view, the DTI tool should be tapered down to a target that we would like, we would achieve affordability if we got that down to four times instead of six and seven." Rehm said.

He said politically, that may never occur, but he was surprised by Housing Minister Chris Bishop's comments that house prices needed to be brought down.

But Rehm said that wouldn't happen overnight.

"That would really be a huge shock to the housing market, but if there's advance notice and the banks know it and the players in the market know it, I think over the course of five, 10 years, you could taper it down.

"I just don't think there's a political will right now."

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