Let's look at what's happening to rental growth and property investment yields around Australia.
The recently released CoreLogic Quarterly Rental Review showed that Rental rates fell over the final quarter of 2018.
Weekly rents across the nation fell by -0.1% in December 2018 to be -0.3% lower over the fourth quarter of 2018 however, rents increased by 0.5% over the 12 months to December 2018.
Capital city rents were -0.4% lower over the quarter and unchanged year-on-year while regional market rents were 0.3% higher over the quarter to be 1.8% higher over the past 12 months.
The annual change in both combined capital city and national rents is the lowest on record based on data which is available back to 2005.
Over the past 12 months, rents have increased in all capital cities except for Sydney and Darwin.
Brisbane and Perth are the only two capital cities in which the annual change throughout 2018 has accelerated relative to the change in 2017.
Gross rental yields are rising, currently recorded at 3.95% nationally at the end of December 2018 compared to 3.85% at the end of the previous quarter and 3.73% a year ago.
Gross rental yields have increased over the past 12 months in all capital cities except for Hobart and Darwin.
Rental rates fell over the final quarter of 2018
Rental rates across the nation were -0.1% lower in December 2018 and were recorded at $433/week.
While rents fell -0.2% to $462/week across the combined capital cities over the month, in the combined regional markets rents increased by 0.2% to sit at $373/week.
Looking at the change in rents over the month across the capital cities, rents were lower in Sydney, Darwin and Canberra, they were unchanged in Melbourne and higher elsewhere.
Sydney remains the most expensive capital city rental market with a median rent of $583/week which is $43/week more expensive than Canberra rents ($539/week) which are the second most expensive in the country.
Historically Hobart has been the most affordable capital city rental market however, strong rises in rents over recent years have pushed rental costs well above those in Adelaide and Perth and now marginally higher than rents in Brisbane.
The rental market remains mixed with rents falling in Sydney and Darwin and a fairly significant slowdown in rental growth in Melbourne.
The Sydney and Melbourne rental markets are seeing the impact of such significant demand from investors over recent years along with a substantial ramp-up in new housing (largely apartment) supply, much of which was purchased by investors.
Darwin rents have been falling for many years and they continue to decline.
The past year has seen a change of direction for both the Brisbane and Perth rental markets, following a number of years of declines, rents are now rising again.
Elsewhere rental rates are continuing to rise however, the rate of growth has slowed compared to a year ago.
Rental growth has slowed but Hobart and Canberra are seeing stronger growth than elsewhere
Rental rates fell by -0.3% over the final quarter of 2018 which was a slightly more moderate fall than the -0.6% decline over the previous quarter but weaker than the 0.2% increase in rents over the same quarter in 2017.
Across the combined capital cities, rents fell -0.4% compared to a - 0.7% fall the previous quarter and no change over the same quarter in 2017.
The combined regional markets saw rents increase 0.3% over the quarter compared to a -0.1% fall over the previous quarter and a 0.9% quarterly increase a year earlier.
Sydney (-1.4%) and Darwin (-2.0%) were the only two capital cities in which rents fell over the quarter while rental rates were unchanged in Melbourne.
Rental rates increased over the quarter in Brisbane (+0.3%), Adelaide (+0.6%), Perth (+0.4%), Hobart (+0.9%) and Canberra (+0.6%).
The rental change was greater over the December 2018 quarter than the previous quarter in each capital city however, compared to the December 2017 quarter, rental changes were lower in all cities except Brisbane and Perth.
Rental rates nationally rose by 0.5% over the 2018 calendar year which was their slowest rate of rental growth any time since 2005.
Annual rental growth has been slowing since it peaked at 3.0% in July and August of 2017.
The 0.5% annual increase recorded throughout 2018 is a slowdown from the 2.7% increase the previous year.
Combined capital city rents are also recording historically weak growth, they were unchanged throughout 2018 compared to a 2.2% increase in 2017.
Although combined regional market rents were not historically weak, annual growth has slowed from 4.0% in 2017 to 1.8% in 2018.
Rental rates have fallen over the past year in Sydney (-3.0%) and Darwin (-5.8%).
Rents have increased over the past 12 months in Melbourne (+2.4%), Brisbane (+1.5%), Adelaide (+1.5%), Perth (+2.0%), Hobart (+5.8%) and Canberra (5.3%).
Rental growth has been slower over the past year compared to a year ago in all capital cities except for Brisbane, Perth and Canberra.
The rental change in Sydney is at an historic low while Brisbane is seeing its strongest rental growth since August 2013 and Perth is seeing its strongest rental growth since July 2013.
The data highlights that there is a general slowdown in the rate of rental growth which is more prevalent in the largest capital cities than regional housing markets.
The slowing rent potentially points to stretched rental affordability, in Sydney and Melbourne particularly, and the effect of a large increase in housing supply and investor purchasing over recent years coupled with reduced rental demand as renters transition to first time home buyers taking advantage of stamp duty concessions available in NSW and Vic.
In Sydney and Melbourne in particular, the weaker rental market conditions look set to continue with a high volume of new housing set to be completed over coming years.
With value growth slowing faster than rental growth, yields have started to lift from record lows
Although rental growth is slowing, dwelling values are falling at a faster rate which is pushing gross rental yields higher from their historic lows.
Gross rental yields at the national level were recorded at 3.95% at the end of 2018, up from 3.73% a year earlier, the highest reading since July 2016.
Throughout the combined capital cities, gross rental yields were recorded at 3.43% in December 2017, rising to 3.69% by the end of 2018, the highest they’ve been since June 2016.
Regional markets have recorded very little change in gross rental yields over the year, with gross yields tracking at 4.94% at the end of 2017 compared to 4.96% at the end of 2018.
Throughout the individual capital cities, gross rental yields at the end of the December 2018 quarter were recorded at: 3.33% in Sydney, 3.46% in Melbourne, 4.47% in Brisbane, 4.36% in Adelaide, 4.09% in Perth, 4.91% in Hobart, 5.76% in Darwin and 4.60% in Canberra.
Compared to yields at the end of the previous quarter, yields were firmer in all capital cities except for Hobart, Darwin and Canberra and it was similar when comparing to yields from the end of 2017 with only Hobart and Darwin having lower yields.
The low yield profile across Australia’s two largest cities, which are also the cities that attract the largest investment demand, suggests that most recent investors, despite the low mortgage rate settings, are likely to be utilising a negative gearing strategy to offset their cash flow losses against their taxable income.
With gross yields at such low levels in these two cities we may start to see investors turn their attention to other cities where housing is more affordable, capital gain opportunities are potentially better and rental returns are superior.
With rental changes continuing to outpace dwelling value changes it is likely that rental yields will continue to firm over the coming months and quarters, particularly in markets like Sydney and Melbourne.
Meanwhile, Hobart, where values continue to climb rapidly, and Darwin where housing value falls have slowed but rents continue to fall sharply are likely to see further rental depression over the coming months.
Key rental and yield statistics
|Yield 12 mths ago||3.1%||3.1%||4.4%||4.3%||3.8%||5.1%||6.1%||4.5%||3.4%||4.9%||3.7%|
|Yield 12 mths ago||2.8%||2.6%||4.2%||4.2%||3.7%||5.1%||5.8%||4.2%||3.2%||4.8%||3.5%|
|Yield 12 mths ago||3.7%||3.9%||5.1%||5.2%||4.4%||5.1%||6.5%||5.4%||4.0%||5.4%||4.2%|