Rental rates across the combined capital cities increased by just 2.8% throughout 2013 with appreciation in dwelling values significantly outpacing rental growth resulting in lower gross rental yields for investors.
Across the combined capital cities, house rents increased by 2.8% in 2013 compared to a 3.2% increase in unit rentals. Rental growth for houses was slower than over the previous year (3.2%) however, unit rents increased at a faster pace than the 2.9% increase the previous year.
Annual rental growth for houses was well below five year average levels of 4.1% pa. For units, rental growth at 3.2% over the past year was also lower than the five year average annual increase of 4.4%. The 2.8% overall increase in home rents throughout 2013 was the slowest rate of growth for a calendar year since 2005.
At the end of 2013, the median rent for a capital city house was recorded at $479 per week and for a unit it sat at $451 per week.
Looking across the individual capital cities, rental growth throughout 2013 has varied greatly on a city-by-city basis. Rental rates increased for houses and units throughout the year across each city except for Canberra.
For houses, Sydney recorded the strongest annual rental increase (4.3%) followed by: Darwin (3.8%), Melbourne (2.5%), Adelaide (2.2%), Brisbane (1.9%), Perth (1.4%), Hobart (0.8%) and Canberra (-4.5%).
Growth in unit rents was also strongest in Sydney at 3.9% over the year followed by: Perth (3.1%), Melbourne (2.1%), Darwin (1.6%), Adelaide (1.3%), Brisbane (0.9%), Hobart (0.6%) and Canberra (-4.9%).
With capital city house rents increasing by 2.8% compared to a 9.9% increase in home values and unit rents up 3.2% compared to a 9.0% increase in values, rental returns from investment properties have generally trended lower over the year.
As at December 2013, the gross rental yield on a capital city house was 3.9% and for a unit gross yields are tracking at 4.7%. At the same time in 2012, the gross yield was 4.2% for houses and 4.9% for units. Combined capital city gross rental yields are currently at their lowest level since September 2011 for houses and since August 2011 for units.
At the end of 2013, house and unit rental yields were highest in Darwin at 6.0% and 6.2% respectively. At the same time, yields were lowest in Melbourne at 3.4% and 4.2% respectively.
Over the year, gross rental yields have eased for houses in Sydney (-0.4% points), Melbourne (-0.2% points), Brisbane (-0.1% points), Perth (-0.3% points), Hobart (-0.1% points), Darwin (-0.1% points), Darwin (-0.1% points) and Canberra (-0.4% points).
House rental yields were unchanged in Adelaide in 2013. Unit rental yields also generally softened, down -0.3% points in Sydney, Melbourne (-0.2% points), Brisbane (-0.1% points), Perth (-0.2% points) and -0.4% points in Canberra. Unit yields have strengthened by 0.1% points in Adelaide, by 0.4% points in Hobart and by 0.3% points in Canberra.
With few rental pressures in the market and low interest rates driving property transactions and home values higher, we anticipate that rental growth in 2014 is likely to continue to underperform home value growth.
There is also the fact that recently high levels of investor activity have introduced a large than normal number of rental properties into the market which is likely to further ease any upwards pressure on rents. As a result, RP Data expects that gross rental yields will continue to trend lower throughout 2014.
Rental yields will be interesting to keep an eye on throughout 2014. If value growth slows, many of those who have recently purchased investment properties may find that they are left with a low yielding property experiencing low levels of capital growth.
Of course many investors choose to negative gear their properties however, for some this could be a challenging future headwind for their residential housing investments.