Rental rates are rising at slower pace than inflation, with rents across the combined capitals up by just 1.8% over the past year.
Each month RP Data reports on rental markets across the country; the current trend across the capital cities is for falling yields and a slowing rate of rental growth.
Over the 12 months to October 2014, combined capital city rental rates increased by 1.8% which was the slowest annual rate of rental growth since August 2003.
The rate of rental growth is easing on the back of a large rise in capital city home values and a strong rise in the supply of new homes being built, as well as a record level of investor buying which is adding more supply to the rental market.
With rents growing at their slowest pace in many years we are also seeing weakening rental yields.
At a combined capital city level across all dwellings, gross rental yields are recorded at 3.8% which is the lowest reading since January 2011.
With the rate of capital gains outpacing rental growth we are seeing rental returns reduce across all capital cities.
In fact, over the past year gross rental yields have fallen across each capital city.
The surge in building approvals over the past 18 months or so is likely to be contributing to the slowing rate of rental growth.
With the number of home sales rising, new housing supply rising, more investor owned properties and population growth slowing, those renting properties have comparatively more housing options to choose from.
As a result, the owners of these investment properties have less scope to increase weekly rents when renters can find alternate accommodation more easily than in the past.
In Sydney rental rates have increased by 3.5% over the past year while home values are up 13.1%. Subsequently yields are recorded at 3.7% the lowest reading since August 2005.
Melbourne home values are 8.9% higher over the year while rents have increased by a much lower 2.5%. Gross rental yields are recorded at 3.3% which is the lowest gross yield across the capitals and equivalent to the lowest yield on record.
With a gross rental yield of 4.5%, yields in Brisbane are at their lowest level since September 2011. Brisbane rents have increased by just 1.3% over the past year compared to home value growth of 5.6%.
Adelaide home values have increased by 4.3% over the past year while rental rates have increased by 1.5%. Rental yields currently sit at 4.2%, their lowest level since September 2012.
Rental rates in Perth have fallen by -3.1% over the past year while home value have increased by 3.4%. As a result, rental yields are recorded at 4.1% their lowest level since January 2012.
Hobart rental yields currently sit at 5.4% their highest level since November 2013. Over the past year Hobart rents have increased by 2.4% and home values are 4.4% higher.
Darwin home values have increased by 5.0% over the past year while rents have fallen by -0.1%. As a result, yields have been relatively steady at 5.9% over recent months.
Canberra rental rates have fallen by -4.9% over the past year while home values have increased by 0.9%. Gross rental yields in Canberra increased over the month to 4.2%.
With a larger supply of new housing and low interest rates likely to drive further growth in home values we anticipate that rental growth will remain subdued over the coming year.
In fact we may see the rate of rental growth slow further as renters see more and more accommodation options being built.
With such tepid growth in rents and such a high level of investment activity it is clear that most investors are buying residential property with a view to capital growth rather than rental returns.