Rental yields to increase as affordability deteriorates and capital growth stalls, experts say

Property prices may be falling but experts say rental yields will continue to grow as prices decrease and low vacancy rates place pressure on prices.

However, one expert warns investors should be wary about placing all their trust in rental properties and says the performance of the market varies greatly depending on the investors’ location.

The RP Data-Rismark Hedonic Home Value Index revealed yesterday prices fell by a seasonally adjusted 0.2% in August, with most capital cities recording decreases in the three months to August.

But RP Data research director Tim Lawless also points out that rental yields have been increasingly strong over the past few months. He notes that since the RBA has normalised rates with six increases, combined with additional increases from banks, capital growth has stalled – but property owners are “still realising positive total returns due to the effect of direct or imputed rents”.

“Rental yields across the capital cities are now showing signs of improvement. RP Data and Rismark
estimate that the gross yield on units is 4.9% while for detached houses is a lower 4.0%. On a total return basis, Australian housing has outperformed most other asset-classes over the last 10 years.”

Rismark chief executive Christopher Joye says rental yields are increasing- simply because of declining affordability and pressure on supply.

“It’s simply a function of price. As capital growth effectively freezes, yields have improved and in concert with that freezing capital growth, we’ve seen very low vacancy rates. Supply is generally tight.”

“I think the final issue is that affordability has deteriorated substantially. You’ve had that coincide with interest rate increases, and very strong price growth since 2009. Affordability in the owner occupier space has deteriorated, making rental accommodation much more attractive. Low vacancy rates and so on explain that rise.”

The figures show yields increased by 4% during August for houses, and by 4.9% for units. The strongest yields were found in Darwin at 5.3%, Canberra at 4.7%, Brisbane at 4.3%, Sydney at 4.1% and Adelaide at 4%.

For units, the strongest yields were found in Darwin at 5.3%, Canberra at 5.2%, Sydney at 45.1% and Brisbane at 4.9%.

SQM Research founder Louis Christopher says the location-specific results are the most telling. He says investors should investigate how widely results can differ from city to city.

“It is a good result, but in terms of being a relatively yield, I would disagree. Residential property has always had a low-yield compared to commercial properties and other areas. 4% is a good results but I would class that as a low yield.”

“The performance really depends on which cities we’re talking about. If we go back to Sydney, we believe that’s where we are going to see the greatest acceleration in rents, resulting in 17% per annum for the next few years. Whereas in Melbourne it will be substantially lower than that. These yields are also lower compared to other asset classes.”

But Joye says this results will only continue to improve, and suggests investors will continue to investigate property as price growth in the owner-occupier market remains stagnant.

“They will continue to improve. They are a manifestation of the greater market and what is going on,
and therefore they are important to investors as to the state of their returns. These good results will continue to be solid.”