Rental growth back on the cards?

The RP Data-Rismark Home Value Index showed that during September 2009, property values recorded their slowest monthly rate of growth of any time this year at just 0.1%. Importantly, during September the First Home Buyers Grant Boost (FHBGB) was still in full swing and interest rates were still at 49 year lows. However, the FHBGB was into its last month in full and the prospect of interest rate rises were certainly being regularly mentioned within the media. These two factors are likely to be major contributors to the slowdown in value growth during the month.
The September Home Value Index results showed that property values fell over the month within Brisbane, Adelaide and Perth while the other capital cities saw value increases ranging from 0.8% in Sydney to 2.8% in Darwin.

Prior to the September slowdown in capital growth, national home values increased by 8.0% under unexpectedly strong market conditions. As capital growth surged ahead the rental market softened as many renters took advantage of the low interest rate environment and strong buying conditions.

On a city-by-city basis rental rates across the nation showed quite varied results during the month. Each mainland capital cities current median weekly rents sit below their peak (which were all achieved during the last year). Adelaide has seen the smallest decline in rents from its peak (-0.6%) while Perth (-6.9%) and Canberra (-5.9%) have recorded the largest falls in rents.

With lower rents and higher property prices, rental yields have been eroded. The average gross yield on a house fell from 4.7% to 4.3% and the average gross rental yield for units fell from 5.4% to 5.0%.

On a city by city basis, only Adelaide (no change) and Perth (0.2% increase) have seen yields remain unchanged or became stronger over the last 12 months, note that these two cities have see negligible price growth. All other mainland capital cities have recorded a softening of yields. When comparing current yields to peak yields, no capital city has yields which currently sit at their recent peak. Brisbane and Perth have seen the smallest difference between current yields and peak yields (-0.3%) while Canberra (-0.8%) has recorded the greatest falls.

On a national basis, the best capital city yields remain in Darwin where houses are yielding 5.9% and units 6.2%. Coming in second is Canberra with gross yields of 4.7% for houses and 5.9% for units. The nations lowest yielding capital city is Melbourne with houses returning 3.9% and units showing a 4.5% yield. Melbourne yields have been eroded more than other capital cities due to the exceptionally strong market conditions over the year to date where home values have increased by 12.6%.

With the inevitable end of the First Home Buyers Grant Boost at the end of 2009 and the cash rate futures market factoring in an increase in interest rates of more than 2% over the next 18 months it is anticipated that the rate of property value growth will slow as first detailed in this month’s results. Fundamentally, the Australian property market is still anticipated to see some value appreciation. This is due to the fact that demand is outweighing supply with record population growth and low levels of dwelling commencements. Along with this, the availability of finance for new development remains difficult to obtain for developers constraining supply, as does the generally long and arduous development application process and the excessive charges placed on new development by local governments.

We are now seeing the first evidence of the falls in rents and yields abating. With housing affordability likely to once again become an issue as interest rate climbs and Government handouts are removed, the likelihood of further growth in rental rates and improvements in yields becomes more likely.

The only potential saving grace is the return of investors to the market (investors introduce more rental supply), which has commenced as first home buyer activity abates. However, increasing demand as fewer first home buyers take the plunge into home ownership and vacancy rates remaining at very low levels suggests that it is more likely that rents and yields will improve.

The likelihood of increasing rental rates and yields for investment properties is good news for investors but not such good news for individuals that didn’t capitalise on property value falls during 2008, historic low interest rates and generous first home buyer incentives.

If you want to learn more about commercial property, don’t miss our free webinar entitled ‘Top tips for buying and leasing commercial property’ on 12 November at 2pm. Commercial property expert Steven Kingston from Charter Keck Cramer will explore the key points every entrepreneur should consider before they purchase or lease a commercial property and, best of all, tell you about the best ways to secure a bargain.