Yield. Why the markets won’t.
You may be looking at the property market and the share market wondering what’s going on here. We have just had one of the sharpest recessions in 100 years and the markets have gone gang busters. Usually, recessions take a wee while to come out of. So what’s driving growing property and share prices and will it continue?
Yield. I don’t mean stop reading (do you like my pun?) As mentioned in earlier writing, the quantitative easing going on here, and around the world, is pushing interest rates down. Who does that affect? Retirees that rely on interest payments to top up their super. With interest rates on investments now below 1%, after inflation and tax you are effectively getting nothing.
Yield, refers to the production of income from an investment. Think of it as similar to interest earned on a term deposit or savings account. Yet, it is very different. When you invest in property, your yield is the rental income you receive off the property. When you invest in shares, you are paid a dividend yield. A share in the profits of a company, split between shareholders. What do they have in common with interest from term deposits? They are all measured as a percentage of the value of the investment. How are they different? Interest paid on a term deposit is set for a fixed term. So, you get a lot of certainty. Rent you receive from property is set based on your current tenancy agreement. At the end of the set term or tenancy you may experience an increase or decrease in your yield. However, your term deposit doesn’t increase in value. Your property, on the other hand, may have increased in value. That means even though you are receiving the same income, your yield may have decreased. So, you need to review, and see if your funds would be better off in an alternative investment. However, property values are not terribly volatile, relative to other investments.
Dividend yield can change more frequently, as share prices change quickly. Companies can also mandate not to pay a dividend to shareholders. Have we explained it clearly enough for you? Drop us a line if you want to discuss further.
Property yields as at the end of September across the country vary between 3.6% in Queenstown to 6.7% in Invercargill. (1) Yields in Queenstown prior to lockdown were sitting around 4%. A high yield in Invercargill is a reflection of higher risk. Lower employment opportunities, fewer industries, higher chances of unemployment and rent not paid. An investor wants to be compensated for taking that additional risk.
Dividend yields, across well known company shares, varied between 1.04% for F&P Healthcare and 6.78% on Contact energy as at the 29th of July (2).
So, as you can see, if you are an investor wanting to top up your income, investing directly into property and shares looks very attractive compared to term deposits. Even if you have a mortgage, property yields are above bank mortgage rates. Effectively, you can have a tenant pay your mortgage off for you. You then sit back and wait for the capital gains.
The property value and share market surges will continue until the yield equation changes. The reserve bank has just announced that they intend to bring loan to value restrictions back in to cool off the property market. Good luck to them. Until the yield equation changes, markets will still experience high demand, driving prices higher. The losers will be first home buyers and those that rely on large mortgages to purchase. So those that are already feeling left out of the market.
Notes:
Disclaimer: This blog is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is also an opinion, so could be wrong. It’s not fake news though.
- Posted by Isbister
- On November 13, 2020