Falling Rental Yields Still Haunting Property Investors

The past year hasn’t been kind to property investors.

In the last three months they’ve sat back and watched home price growth tail off right across Australia. Even fast-growing markets like Sydney have seen prices slow to a crawl.

The effect of this has been particularly hard on investors negatively gearing properties. For the others, still relying on the tried and tested strategy of covering mortgage payments with rents, life’s getting that little bit harder.

A few months back, property market analyst CoreLogic reported that rental yields were growing at their slowest rate in two decades. In the time since, the situation hasn’t improved. Worse than that, the figures are even more disappointing.

National rental growth has slowed to a point where, well, it’s not growing anymore. Worse still, yields on rents have fallen by 0.3% from this time last year. Rental yields are just 3.5%, compared to 3.8% 12 months ago.

And it comes at a particularly rough time for investors. Lenders have already slapped them with higher borrowing rates.

Yet, as always, national figures never tell the whole story. Australia doesn’t have a single-minded property market. It has winners, losers, and little else in between. And it’s no different when it comes to rental rates either.

The good news is Melbourne, Sydney, Hobart and Canberra all saw annual rents tick up. Melbourne witnessed the most growth, with rents up 2.1% from this time last year. Last month alone, Melbourne managed a 0.4% rise in rents, which isn’t shabby by any means.

By comparison, rents across Sydney grew by just 0.1% in January. And in Brisbane, rents actually declined by -0.2%.

At the other end of the scale, rental declines in Perth and Darwin were quite marked. Year on Year (YOY) rents in Perth have fallen by -8.6%. In Darwin, rents are down a staggering -13.4%. These two cities, rocked by the mining bust, are the reason why national rental growth fell to zero.

You’ll get a better idea of the state of each individual market in the chart below.


Source: CoreLogic (via the Australian Financial Review)

Away from rental growth, there was some better news on the yield front.

Rental yields still remain above 3% right across the nation. Smaller markets, like Darwin and Hobart, are worth picking out here, with yields above 5%. In any case, there’s value for investors right across the country.

Yet, while yields are respectable, the worry for investors will be that they’re falling. Not one city managed to buck this national downward trend. To be fair, yields typically trail rents; it’s no surprise then that yields are on the wane as well.

Still, that probably won’t improve investor confidence in the short term. Especially for those investors that are negatively gearing.

Why rental growth is slowing

There are many reasons why rental growth has fallen to zero over this past year.

Chief among these is that there’s simply too much housing stock in the market. Anytime renters have options, landlords tend to lower demands, and rents, as well. In some instances, landlords have been lowering asking rents just to keep hold of existing tenants.

On top of this, we’ve also seen a broader slowdown in the amount of people settling in Australia. Weaker migration rates are leading to slower population growth, which is hurting demand for accommodation.

Finally, weak wage growth plays an important role in all this too. In fact, it might not be surprising to learn that wages are growing at their slowest rate in two decades, just like rents. Rents and wages are like two peas of the same pod. If people can’t afford to pay more, then the market doesn’t ask for as much.

Where rental yields go from here?

According to CoreLogic, rental rates are likely to keep falling this year. It’s projecting capital gains to outstrip rental growth in the coming months.

That’s probably the right call, all things considered.

Rental yields are already growing at their slowest rate on record. A rebound seems unlikely, what with high supply and a rise in building approvals. Mounting investment levels are likely to place a lid on rental growth in 2016.

All this leaves renters with plenty of choice at their disposal. Choice brings with it more affordability in the market. That’s good news for renters; not so much for investors.

For more information, and access to the full report, head on over to CoreLogic by clicking here.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Markets and Money’s property expert, Phillip J. Anderson, doesn’t take much notice of the price indicators in the market. He’s maintained for some time that house prices will boom over the coming decade. That should lift the spirits of any investor fearing the worst as they watch both rents and house prices fall.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.

He was right on both accounts.

In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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