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Investors get set to have their capital growth cake and eat it too as rental yields rise

Property investment enthusiasts usually fall into one of two categories. There is a distinct line drawn between those who favour capital growth above cash flow and those who prefer positive gearing that puts  a small amount of money back in their pocket each month.

Not so long ago, both sides would argue that there strategy was the best and you had to pick a team. Essentially, you couldn’t have positive cash flow with a high growth property and likewise, you couldn’t have above average long-term growth and earn an income above and beyond your investment expenses.

Soon though, investors might have the ability to enjoy the undeniable benefits of high growth real estate (anyone who is a regular reader of my blogs knows this has always been my preference), within a portfolio that either pays for itself or produces a little bit of extra icing on the cake.

Rental yields to rise

According to the latest NAB quarterly residential property survey as published in Property Observer, rental yields are set to outpace house price growth over the next two years as rental prices grow exponentially across all capital cities.

The bank surveyed a number of property professionals who forecast rents to grow by 2.1 per cent over the next 12 months and by 3.4 per cent over the next two years, as highlighted in the below table.

Respondents expect that house price growth will not perform as well as rental growth, anticipating an increase in property values of just over 0.4 per cent for the next 12 months and a sluggish 1.7 per cent over the next two years.

Survey respondents, including real estate agents, property developers, investors and valuers, believe that the combination of continuing rental growth and low interest rates is enticing investors back into the market.

For mums and dads who have equity in their home, stable employment and the ability to service a loan, now is an ideal time to consider getting into the real estate game as a wealth creation vehicle to take you into your golden years.

The NAB survey suggests that the downward correction in national house prices may be slowing, with prices falling 0.7 per cent in the third quarter following a 1.6 per cent decline in the second quarter.

Proving that even when our housing markets fall on tough times the Australian passion for all things property is difficult to deny, overall sentiment about residential housing picked up by four points over the September quarter, following a fall of eight points in the previous quarter.

According to the report, investor demand is growing across most inner city areas and for those seeking good long-term capital growth prospects, this is the best place to focus on investment buying, particularly in the sub-$500,000 range.

“Buying activity is much more cautious in the prestige market, with capital growth expectations for that sector considered to be ‘poor’ in both the housing and apartment markets in all state markets,” says NAB.

While property sales remain sluggish across most states, rental demand is going from strength to strength with low vacancies driving a 0.2 per cent increase in national rents for the September quarter, just below the 0.4 per cent gain in the previous quarter.

Not surprisingly, the most pressing demand for rental accommodation is in resource rich Queensland and WA, where rents increased by 0.6 per cent and 1.1 per cent respectively for the latest quarter as, “the continued influx of transient workers is keeping vacancies low”.

Could a property investment boom be on the cards for Australian real estate over the coming year or two?

When you combine all of the underlying drivers;

  • low interest rates easing the burden of servicing an investment loan,
  • declining confidence equities and the share market
  • rising rental yields making cash flow management easier
  • increasing interest from overseas buyers in our inner city apartment markets,

…it’s conceivable to think that investors will potentially drive the next inevitable housing upswing.

The key is to get in before prices start to climb and that takes courage, foresight and a sound investment strategy. Do you have what it takes?

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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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