Weak Rental Yields Highlight the Dangers of Property Investing

Property investors won’t be too upset to see the back of 2015. Last year was one they’ll want to quickly forget, and for good reason.

It wasn’t enough that banks jacked up rates on investment loans. Investors also had to watch as the property market erred on the wrong side of a price correction. Year on year price growth across the combined capitals finished the year at a solid 8.7%. Yet the quarter to November saw prices decline -0.5%. So while capital gains had a good year on the whole, they fell at the last hurdle. Because of that, the future looks far less encouraging than it might otherwise.

But that’s only the start of the bad news. It wasn’t just capital gains that faced pressure in 2015. The other side of the coin is that rental yield growth slumped to its slowest level in 20 years.

According to new figures from CoreLogic RP, rents grew by a measly 0.3% in 2015. The slight uptick in yields means that, while not declining, rents are growing at the slowest pace since records began in 1996.

You only need look at a comparison over the last two years to see how dire things have become. In the 12 months to December 2014, rental yields were up by 1.8%. Compared to growth of just 0.3% in 2015, the difference is stark.

National rental yields: a mixed bag

When you look at the rental figures in close detail, you’ll see that performance varied right across the country.

Brisbane saw rental yields fall -0.3%. Adelaide also weakened, down -0.2%. Yields in Perth fell sharply, down -8%. Meanwhile, Darwin was the worst performer, with yields down -13.3%. Both Perth and Darwin in particular continue to experience the effects of the downturn affecting the mining sector. As jobs have dried up, people have headed elsewhere, leaving their rental markets with sluggish demand.

There were also a few notable gains across the national rental market. Sydney, Melbourne, Hobart and Canberra all saw yields rise. Yet only Melbourne saw yields creep above 2%. Nonetheless, rental growth has rarely been this sluggish, despite an uptick across those cities.

So why are rents falling so much?

We can put it down to a mixture of overlapping factors. Housing oversupply, high rental stock and slowing migration have all played their part. According to CoreLogic, we can also square some of the blame on knock on effect of capital growth. As it explains:

The reason why yields have gone so low is the fact that capital growth, particularly in Sydney and Melbourne, has been so much stronger than rental growth, and that’s pushed those rental returns down.

The problem, as investors might see it, is that few of these factors will change for the better. Housing supply will continue to be a problem in 2016, as the numbers of unit dwellings swell over the coming year. And with population growth expected to slow further, that will only weaken demand across the market.

Of course, renters won’t care how or why rents are falling. They’ll want more of the same in 2016. Yet for investors relying on rents, the outlook remains less favourable. And with both rents and capital gains on the wane, negative gearing might prove less effective in the New Year.

Housing supply set to increase in 2016

You may have noticed a rise in construction activity of late. Especially if you live in cities like Sydney or Melbourne, where rents are still growing. Yet while this does reflect the strength of these markets, it could also prove their Achilles heel.


The problem is that unit, or apartment, leasing is far more common than it is across the housing market. So as unit supply expands, these new dwellings will add to an already large pool of apartments that exists. That’s only going to put pressure on yields, as supply continues to outstrip demand.

It’s hard to see then how rental yields can improve in places like Melbourne or Sydney? How will new waves of apartments lift sluggish rental yields? They won’t. All it will do is create even more pressure on the already weak 0.3% rental growth in 2015.

CoreLogic also expect rental yields to decline further during the year. As Cameron Kusher, a researcher at CoreLogic, notes:

The construction boom across the capital cities, coupled with slowing population growth, low mortgage rates and the recent heightened level of activity from investors are the major contributing factors to the slowing rental growth in 2015.

It is clear that the increase in investment stock continues to provide landlords with little scope to lift rental rates while the low mortgage rate environment provides little incentive to push yields higher.

All this means it that 2016 is shaping up as something of a renter’s dream. Average rents, across the country, amounting to $483 a week on average, are by no means cheap. But, as far as renters are concerned, at least they’re not likely to rise this year.

Ultimately, renters haven’t had this much leverage in the market for a long time. They can even realistically hope of negotiating down their weekly rents with landlords. That’s not something they’ve been able to say for a long time.

While this is great news for renters, the same can’t be said for landlords. They have to contend with the prospect that both rental yields and capital gains will decline in 2016. While nothing is set in stone, evidence suggests 2016 will prove another difficult year for investors.

At the very least, we can say that property investing hasn’t carried this much risk for a long time.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Interest rates will play a big part in the direction of the housing market in 2016. According to The Daily Reckoning’s Phillip J. Anderson, interest rates are likely to stay at record lows for a long time.

Phil has a knack of seeing things other people don’t. He went against the mainstream, arguing that interest rates would remain low…even as economists were predicting rate hikes. Already at a record low 2%, rates are likelier to fall again than rise.

Phil’s new report, ‘Why Interest Rates Could Stay Low for the 21st Century’, is a timely reminder of what awaits us in the future. In it, he warns that you won’t be able to count on savings to fund your retirement. Instead, inflation stemming from low rates will eat further into your reserves.

But there are ways you can benefit from this…provided you act now.

Phil wants to show you the best way to invest in this low rate environment. That’s why he’s prepared a four-step strategy to help you boost your portfolio. You’ll learn exactly where to park your cash over the coming decades. And how this could help grow your wealth over time. To download the 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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