The combined effect of low rental yields and declining dwelling values has resulted in a rapid reduction in overall returns from housing over the past year.
The CoreLogic Total Returns Index is similar to the ASX200 Accumulation Index in that it measures overall housing market returns.
To do this it measures annual value changes along with annualised gross rental yields to provide the total picture on typical housing returns.
Over recent years value growth has been much stronger that rental returns so the majority of the returns have been achieved via capital gains rather than rental income.
With dwelling values now falling and gross rental yields close to historic lows, the total returns from residential housing are not looking so attractive and a greater share of returns are coming from the yield component.
With national dwelling values having fallen by -1.6% over the 12 months to July 2018, total annual returns have fallen to just 1.9% which is the lowest they’ve been since June 2012.
The fall in total returns has been substantial given that a year earlier total returns were recorded at 14.2%.
Across the combined capital cities, total returns over the 12 months to July 2018 were recorded at 0.8% which was the lowest they’ve been since May 2012.
Total returns across the combined regional markets were recorded at 6.6% over the past year which was the lowest they’ve been since June 2013.
As the chart shows, total returns are falling across the combined capital cities and the combined regional markets with capital city returns falling much faster.
A year ago, annual total returns were recorded at 14.8% across the combined capital cities and 12.0% across the combined regional markets.
Over the past 12 months, total returns in Sydney have fallen by -2.5%.
The -2.5% fall in returns over the year is the weakest result since February 2009 and is a substantial slowdown in annual returns from July 2017 when they had increased by 19.0%.
With dwelling values falling -5.4% in Sydney over the past year it highlights that value changes largely dictate total returns in Sydney.
In regional NSW total returns increased by 6.7% over the past year which was the smallest annual increase since February 2013.
Annual returns in regional NSW have slowed from 17.1% a year ago.
With values falling over the past year in Melbourne there has been a substantial reduction in total returns.
Over the past year, total returns in Melbourne have been recorded at 2.4% which was down from 16.6% a year ago and was also the lowest annual return since October 2012.
Total returns in regional Vic have remained much more stable than those in Melbourne.
Over the past 12 months, total returns in regional Vic have been recorded at 9.8% which was only slightly lower than the 10.4% total returns recorded a year ago.
Value growth is only slightly lower than it was a year ago in regional Vic which is a key contributor to fairly steady total returns.
Over the past year dwelling value growth has slowed across Qld which has contributed to a moderate reduction in total returns.
Over the year, total returns in Brisbane were recorded at 4.8% which was the lowest return since July 2013 and down from 7.5% a year ago.
Regional Qld total returns were slightly stronger than those in Brisbane at 5.2% however, they too were down from 9.1% a year ago and the 5.2% was the smallest annual return since October 2012.
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The rate of dwelling value growth has slowed over the past year in Adelaide and so too have total returns while the rate of value decline in regional SA has slowed, providing a boost to total returns.
Total returns in Adelaide were recorded at 4.9% over the past year compared to a 6.1% return in regional SA.
In Adelaide, returns have fallen from 9.9% a year ago and are the lowest they’ve been since June 2013.
Total returns in regional SA have increased from 5.2% a year ago and are the highest they’ve been since January 2017.
Although values have fallen over the past year in both Perth and regional WA, total returns in each region remain positive.
Over the past 12 months, total returns in Perth were recorded at 1.6% which was an increase from 1.2% a year ago however, annual returns have eased slightly over recent months.
In regional WA, total returns were recorded at 0.6% over the past year compared to 1.8% a year ago.
With strong increases in dwelling values over the past year Hobart has recorded the nation’s highest total returns at 17.1%.
Although 17.1% represents much stronger returns than all other capital cities it is lower than the 19.7% a year ago and also lower than the recent peak of 20.2% in September 2017.
Regional Tas has also generated comparatively high total returns over the past year of 12.0%.
The 12.0% annual returns are down from 14.1% a year ago which was the recent peak.
There is a big discrepancy between total returns in Darwin and regional NT which is also reflective of the significant differences in value changes over the past year.
Over the past year, total returns in Darwin were recorded a -0.8% which is down from a positive returns of 2.5% a year ago.
Although total returns are falling, the magnitude of the fall has slowed over the past two months.
In regional NT total returns were recorded at 12.3% which was a substantial improvement on the 1.4% annual return a year ago.
Over the 12 months to July 2018, total returns for Canberra dwellings were recorded at 7.0%.
The 7.0% annual return was lower than the 12.8% recorded over the previous 12 months.
As the chart shows, returns have trended lower over the past year but have begun to stabilize over recent months.
The most recent data shows that there has been a significant fall in investor mortgage demand.
Over recent years most of this demand has been in Sydney and Melbourne, both of which have seen a significant slowdown in total returns over the past year.
Given the decline in returns and an expectation that returns will continue to shrink as values decline further, it is anticipated that investor mortgage demand will also shrink, particularly in Sydney and Melbourne.
Investors could see renewed interest for housing in other regions of the country where total returns remain positive however, the returns are anticipated to be far inferior to those recorded over recent years in Sydney and Melbourne.