What’s really happening with rents and yields?

Between August 2005 and February 2010 national capital city rental rates have increased by a total of $133/week for houses and by $132/week for units. Over the last 12 months weekly rental growth has been much more subdued with house rents remaining virtually unchanged and unit rents increasing by $10/week.

Much of the rental growth recorded over the last year has come in recent months after rental rates recorded minor falls mid way through 2009. National capital city rental rates are currently recorded at $440/week for houses and $417/week for units

During 2009 weekly rents fell by as much as -4.5% for houses and by -1.4% for units. Given that interest rates hit 49 year lows and the First Home Owner’s Grant Boost was available resulting in the greatest level of first time buyer activity on record it wasn’t surprising to see rental growth easing. With so many renters moving into home ownership it comes as no surprise that rental growth has eased. Added to this was the fact that rents had been recording steady and consistent growth during recent years.

Looking at rental yields over the recent past they don’t tend to show as much movement as property values and rental rates can. Between August 2005 and February 2010 national capital city rental yields have sat at an average of 4.2% for houses and 4.9% for units. At their peak, rental yields for houses sat as high as 4.7% and units as high as 5.4%.

The important thing to remember is that given reported rental yields are a ratio of the price paid for a property and the current rent these measurements are only as at today’s date.

Also, the yields reported are ‘gross’, meaning they do not factor expenses such as maintenance and other costs included in a ‘net’ calculation. If you purchased a home in August 2005 the median house cost approximately $350,000 and the median unit $285,000. Based on today’s rents this equates to a yield of 6.5% for the house and 7.6% for the median unit an impressive rental yield result in less than five years.

Looking at the differential in average costs between renting and owning a property across Australia provides an intriguing insight. Between August 2005 and February 2010 it has, on average, cost 80% more to own a house than it costs to rent a house. For units it has on average cost 54% more to service the annual home loan debt than it costs to pay the rent each year. Currently, it costs 63% more to service the debt on a house than it does to rent whilst for units housing is 42% more expensive. Although both the house and unit ratios are well below the levels recorded before the Global Financial Crisis (GFC) both are beginning to increase once more. The fact that this differential is climbing again lends weight to argument that housing affordability is once again set to become a worsening issue.

On a city by city basis Hobart has recorded the greatest increase in weekly rents over the year, with rents up 11.0%. Darwin (9.0%) and Melbourne (5.8%) also recorded relatively strong growth in rents. The greatest annual falls in rents were recorded in Perth, falling by -6.9%. Canberra (-3.3%), Sydney (-1.5%) and Brisbane (-0.5%) also recorded annual falls in rents.

All Australian capital cities except Hobart have recorded a softening in rental yields during the last 12 months. This is the impact of all cities recording growth in values and first home buyers becoming extremely active which has eased rental rates within most cities at some stage during the last 12 months. The greatest fall in yields has occurred in Canberra where they have eased by 0.9% over the last 12 months. Significant easing has also been recorded in Sydney and Perth with yields falling by 0.6%.

Moving forward, we anticipate that rental rates which are showing early signs of recovering, will continue to improve during 2010, largely due to the fact that rental demand is set to increase as more prospective buyers are blocked from buying due to affordability constraints.

Additionally, ongoing strong population growth creates additional demand for rental accommodation from those migrants who choose to rent rather than buy. We are also anticipating that the rate of property value growth will slow as interest rates rise and housing finance commitments soften (as we have already seen). This may lead to conditions where yields can improve from their current low levels.

Tim Lawless is the Director of Property Research at RP Data.