A poor quarter for rents

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By Leith van Onselen

Australian Property Monitors (APM) on Friday released its Rental Market Report for the March quarter (below) and, sadly for those hoping rising rents in will justify property investment in an era of flat capital growth, the quarter was a disappointment.

All capital cities, with the exception of Hobart and Darwin houses, recorded flat or falling rental growth in the December quarter:

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In the 12 months to March 2012, rental growth has failed to beat inflation in the major southern capitals. Segments of the Brisbane (units), Perth (houses), and Darwin (houses) have done better:

One of the most important aspects of the APM rental series is the very poor rental growth that has dogged Melbourne over a long period of time. As shown in the below chart, median Melbourne house rents have increased by only $10 since June 2008 – well below the rate of inflation. Melbourne median asking rents are now well below the other major capitals:

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The divergence between Melbourne rental returns is more stark when rental yields are charted. And with rents flat lining, the recent improvement in Melbourne gross yields, from 3.6% in September 2010 to 4.1% currently, has been caused entirely by falling house prices:

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As has been mentioned many times on this blog, Melbourne has for years dominated the nation’s new home construction, and this extra supply is having a dampening effect on Melbourne rents. With Melbourne vacancy rates remaining elevated, and significant new housing construction still in the pipeline, expect to see Melbourne’s rental under performance continue.

APM do not calculate rental yields at the national level. However, these have been estimated below by weighting the capital city yields by the number of households.

As you can see below, the median gross rental yield nationally in March 2012 was 4.6% for houses and 5.1% for units, which remains well below the average discount variable mortgage rate of 6.7%. This means that the average new property investor will be negatively geared (i.e. rental income does not cover holding costs), which is a risky strategy when capital growth is limited:

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Finally, gross rental yields – i.e. before outgoings like maintenance costs, agents fees, taxes, body corporate fees, etc – have improved versus the average one year (risk-free) term deposit rate (as interest rates fell) but remain unattractive so long as capital growth is scarce:

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APM March 2012 Quarter Rental Report FINAL

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.