Although value growth has been quite limited over recent years, rental rates have been trending higher and there has been some subtle improvement in gross rental yields.
Last week’s Property Pulse investigated why investors are surging back to the market. Our reasoning was that although rental growth is moderate and yields are virtually unchanged over the year, the fact that returns on investment properties are significantly higher than the return on cash in the bank is likely to be one of the key reasons attracting investors to the housing market.
This week, we look at the rent and yield performance across each of the capital city housing markets.
Rental growth over the past 12 months across the combined capital cities has been quite moderate although it has outpaced home value growth.
Over the 12 months to April 2013, capital city rental rates have increased by 3.5% for houses and 3.3% for units; a relatively measured rate of growth but higher than inflation. Across the combined capital cities median weekly rents are recorded at $474/week for houses and $440/week for units.
Across the individual capital city housing markets, the rental growth performance over the past year is quite varied. Rental rates have surged over the year in Perth and Darwin and at the other end of the spectrum, they have fallen in Hobart and Canberra.
Over the 15 years to April 2013, capital city rental rates have increased at an average annual rate of 4.2% for houses and 3.7% for units. These figures suggest that rental growth over the past year has been below the longer term average.
Over the past 15 years, annual rental growth has been strongest in Perth, Canberra, Sydney and Brisbane. Across the other cities the annual rate of rental growth has been lower, significantly lower in some instances.
As at April 2013, house rents were most expensive in Darwin ($614/week) followed by: Sydney ($572/week), Canberra ($539/week) and Perth ($508/week). For units, rents are currently highest in Sydney at $498/week followed by: Darwin ($486/week), Canberra ($448/week) and Perth ($446/week).
The other important feature of a property or of a market is the rental yield. Of course the rental yield after costs or ‘net yield’ is most important in consideration for an individual property while the figures quoted here at a capital city level are the gross yield (note that gross yields are synonymous with property market reporting due to the fact that that the expense profile for individual investors can vary greatly depending on level of their deposit, the mortgage interest rate, the amount of maintenance required on the property, tax concessions, etc). Gross rental yields across the combined capital cities are currently recorded at 4.2% for houses and 4.9% for units.
As you can see from the graph, yields showed a significant compression between 1997 and 2004 and since that time there has been little overall change in gross rental yields.
Over the past few years we have some slight increases in yields for houses and units. This has occurred due to ongoing increases in rental rates at a time when home values had been declining across all capital cities.
Across the individual capital cities, gross rental yields for houses are currently highest in Darwin for both houses (6.0%) and units (6.1%). On the other hand, Melbourne is recording the lowest gross rental yields across the capital cities for both houses (3.6%) and houses (4.4%).
The fourth table highlights that over the past five years there has generally been a subtle improvement in gross rental yields across each city. Despite this improvement, across each city and property type, current rental yields are significantly lower than where they were 15 years ago.
Overall the data shows that rental growth over the past year has been below longer term averages, keeping in mind that home value growth has also been extremely limited on an historical basis. The data also shows that gross rental yields are trending higher at a sluggish pace.
Given the current economic environment and cost of housing, it seems unlikely that gross rental yields will return to their previous levels however, rental growth has historically been fairly moderate and if it reverts to this level throughout this period of low value growth we may see further improvement in gross rental yields over the next year.
Note that the rpdata-Rismark methodology for calculating yields and subsequently rents is based on an imputation methodology whereby we look at advertised rents over the past six months relative to each property within the capital city. We then fit a rental model for each individual property based on the advertised rents and its specific attributes.