Victorian property investors are making losses

From Martin North, cross-posted from the Digital Finance Analytics Blog:

We can spot the best and worst investment property returns across the nation, using updated data from our household surveys. The average GROSS rental return in Australia is 3.9%, the NET rental return (after interest costs, management and repair costs etc, but before tax) is 0.4%. The average net equity held in a investment property is $161,798. This is the marked to market value of the property, minus the loans outstanding.

The data takes account of lower interest rates, and changes in rents as well as the latest property values. Things get interesting when we start to look at the segmented data. Not all investment properties are equal. Here is the average by each state.

The left hand scale shows both gross rental yield (blue) and net rental yield (orange), while the line shows the average net equity in the property. We have sorted from lowest net rental return.

In VIC whilst the average gross return is still at 3.3%, the average net return is a 0.2% LOSS, while the average equity is $152,412. Compare this with QLD, with a gross return of 4.5% and a net return of 1.1%, with equity of $154,665. The best net return is to be found in TAS, where gross yield is 5.3%, net yield 1.7% and average equity $141,595.

Another way to look at the data is by our household segments. Here we find more affluent households are getting significantly better net returns (before tax) compared with those with lower incomes, including battlers, those living on the city fringes, and multicultural families.

Cutting the data by our property segmentation, we find that portfolio investors are doing the best, with net returns well above 1%.

Looking at our geographic bands, we find those on the urban fringe, or suburbs doing the least well. The best returns at a net yield level can be found in the CBD or CBD fringe.

Finally, we can drill down to individual postcodes and suburbs. To illustrate this, here is a chart of the 20 worst performers in VIC.  Households in Glenlyon (3461), a suburb of Bendigo about 86 kms from Melbourne are at the bottom.

The average net yield is a LOSS of 3.5%, and a net equity of just $24,000.

Remember that we are looking at the data before tax. Many investors will be willing to wear low net returns on property, to offset other income because of anticipated future capital gains. Negative investment gearing has a big impact on household investment behaviour.

Comments

  1. Has Martin just landed on this planet and not had time to understand how things work? The lower yields go, the better property infestors do. Falling yields = rising prices.

    • And then there’s the tax returns. He’s forgetting about the 20 grand tax returns……that’s what it’s all about.

      • exactly jumbo. Neg gearing is just soooo good. How many has Turnbull? 7?
        Now China is great on this, new rules in Beijing, Tianjin and Suzhou ban owning more than one house for those who also must live in the city.
        Surely we could do that, apply it to chinese here.?
        Very straight forward.
        1.overseas passport holders can buy I house
        2.if they live in it (new development only not in established area via a knockdown)

      • Correct Jimbo.
        I am looking forward to some 10-15k (according to what I got last year) on the two large units that I finished getting built in early 2014.
        But hey, as opposed to the negative gearing junkies out there, I actually got something built!

  2. La La….

    The price of complexity in financial networks
    Stefano Battiston,Guido Caldarelli, Robert M. May, Tarik Roukny, and Joseph E. Stiglitz

    http://www.pnas.org/content/113/36/10031.abstract.html

    Abstract
    Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.

    “Core-halo instability in dynamical systems”

    https://arxiv.org/pdf/1302.3199v2.pdf

    “This paper proves a set of instability theorems for dynamical systems. As interactions are added between subsystems in a complex system, structured or random, a threshold of connectivity is reached beyond which the overall dynamics inevitably either becomes highly oscillatory, unstable, or both. The threshold occurs at the point at which flows and interactions between subsystems (‘surface’ effects) overwhelm internal stabilizing dynamics (‘volume’ effects). The theorems are used to identify oscillation/instability thresholds in systems that possess a core-halo or core- periphery structure, including the gravo-thermal catastrophe – i.e., star collapse and explosion – and the interbank payment network. In the core-halo model, the same dynamical instability underlies both gravitational and financial collapse.”

    Disheveled Marsupial…. BOOM de ay….

    • Hmmmmm, all those spreadsheets around the country are built around the premise of rent=MAX(MIN(cost_recovery, neighbour’s_house_rental), asspluck_wish_value) may need reassessment….

  3. The inclusion of interest costs in calculating net return is likely to severely distort the table.
    Portfolio investors would tend not to be negatively geared so would have the higher returns.
    They also would be most likely to have investments in larger industrial and commercial properties which generally have a higher yield as they are not as sought after by negatively geared investors so many have a greater focus on net yield as they need to distribute income to investors.
    Older people would tend to have less debt, middle year higher income working people would tend to be making greater use of negative gearing as they avoid high tax rates and seek to build lower taxed capital gain for retirement.
    To my mind the analysis is not as finely grained as it needs to be to be meaningful for drawing other than the most broad and general conclusions.

  4. Meaningless analysis here.. based on values today so it really only might mean something for those that purchased in the last year

    so it is 3.9 gross, 0.4 net after (after interest costs, management and repair costs etc, but before tax) but then you claim all those back against earnings and add in depreciation and voila

    soon most investors will be gross positive from day one with RBA scissorhands looking to cut further