RP Data’s Cameron Kusher has today released an interesting report on residential rental yields, which are falling across Australia as price rises exceed rental growth:
The September RP Data-Rismark Home Value Index covering capital city house values shows an increase by 5.7 per cent over the past year while unit values increased by 4.4 per cent. At the same time, rental rates increased by just 3.1 per cent for capital city houses and 2.6 per cent for capital city units.
Over the years, and as can be seen in today’s accompanying charts, the annual rate of rental growth has seldom outpaced the annual rate of home value growth. The two instances in which this has occurred was when home values fell through 2008, 2011 and 2012. Of note is that rental rates never fell on an annual basis over the period however, the growth was generally moderate.
Movement in gross rental yields over recent time shows that as home values experienced strong growth throughout early 2000, a significant deterioration in rental yields was evident. Since that time an improvement in yields during 2008 and 2011/12 can be seen as rental growth outpaced value growth. However, Mr Kusher said that yields never returned to their previous highs. In recent times, gross rental yields have started to ease as growth in capital city home values outpaced rental growth.
While Mr Kusher said that there will always be discrepancies between the performances of rental growth across individual capital cities. “If we firstly look at the annual change in major capital city rental rates we will see that the general trend is that rental growth is either slowing or quite sluggish.”
Rental growth for homes across the major capital cities over the past year has been recorded at: 3.6% in Sydney, 2.1% in Melbourne, 2.3% in Brisbane, 2.5% in Adelaide and 4.6% in Perth. At the same time 12 months ago, the annual rental growth figures were: 2.0% in Sydney, 1.2% in Melbourne, 2.5% in Brisbane, 0.3% in Adelaide and 11.4% in Perth.
Kusher also warns investors about the risk of paying too higher prices, particularly given that interest rates will eventually rise:
Advertisement
…although value growth may be strong at the time when mortgage rates are incredibly low, once rates eventually increase, value growth can quickly slow which was evident in late 2009 and 2010.
“While there are benefits associated with negative gearing, investors may like to look at the longer term costs and benefits associated with housing market investment rather than just speculating on a short-term capital gains. The problem with a strategy around purchasing for investment purposes in the current market are two-fold.
“Firstly, capital gains as opposed to rental return is not realised until the point of sale. Secondly, although home value growth may be strong at a time when mortgage rates are incredibly low, once rates eventually increase, value growth can quickly slow. A feature rarely seen across the residential housing market is simultaneous growth in values and growth in rental rates.
“Given that yields are based on rental rates and home values, if values rise quicker than rents you will see an erosion of rental returns, “Mr Kusher said.
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.
