By Martin North, cross-posted from the Digital Finance Analytics Blog:
Traditionally in the Australian context loans to property investors have tended to perform better than loans to owner occupiers. This is because investors receive rental income streams to help pay for the mortgage costs, they are willing to carry the costs of the property against future capital gains, and many will be able to offset costs against tax, especially when negatively geared. In addition, occupancy rates in most states have been stellar.
But things are changing, as the costs of borrowing for investment purposes have risen (thanks to the banks’ out of cycle rises), while rental returns are flat, or falling and costs of managing the property are rising. The supply of investment property is rising, and occupancy rates are declining in a number of key markets.
So today, we look at the latest gross and net rental yields by using our Core Market Model.
First, we look at yields by type of property. Gross yield is the rental streams received compared with the value of the property; before costs. Net yield is calculated by subtracting the costs of the property, including interest costs on mortgages, management costs and other ongoing maintenance costs. We calculate the net yield before any tax offsets.
Across the nation, units overall are providing a slightly better net return than houses.