| | Yields eroded during 2009 as capital gains
outpace rental growth
|
| A feature of the property market during 2009 has been strong value growth in many capital cities, significant first home buyer activity, falling rents and subsequent yield erosion.
The indicative gross rental yield is a measure used by property investors as a guide on what level of rental return they are likely to earn on a rental property. The calculation is simply the annualised weekly rent divided by the median price with the resulting figure expressed as a percentage. On a suburb-by-suburb basis the median price is used but across individual properties most owners will use the purchase price.
In most instances, rental yields have eased over the last year due to increases in property values and an extremely active first home buyer market which has eased some of the pressure on the rental market. With a higher property price and rents in many cases similar or lower than what they were a year ago, the return from the property investment is not looking as solid, in many instances, as it did 12 months ago. The falls in rents and erosion of yields have been significantly more noticeable during the last six months as property value growth has ramped up.
Across the housing market, the mining and resource centre of Collinsville in North Queensland has seen it’s indicative gross rental yields fall from 9.1% last year to 6.7% this year (-2.4%). Median rental rates in the suburb have actually fallen by -20.0% during the year and house prices have increased by 8.7%. What is perhaps most interesting is the fact that had you bought at last year’s prices (prior to the 8.7% increase) and were now receiving current rents, the indicative gross rental yield would sit at 7.2%. Whilst this result is not as strong as the 9.1% yield last year it is much better than the current yield of 6.7%.
Looking across the 20 results detailed for houses, in each instance except for the suburbs of Sorrento and Cobar the yield today would be better had the home been purchased 12 months ago rather than being purchased at today’s prices. Despite this, in virtually all instances the yield would still be lower than it was 12 months ago. In virtually all instances owners have witnessed an increase in the median price of properties within the suburb.
For units, Cromer on the Northern Beaches of Sydney has witnessed the greatest decline in rental yields over the last year, falling from 7.1% to 4.6%. Over the year units in Cromer have seen strong median price growth of 19.2% whilst rental rates have fallen by -22.1%. If the median unit was purchased last year the owner would be receiving a gross rental yield of 5.5% rather than the current 4.6%.
The 20 unit results displayed show that in every single instance had a unit been purchased 12 months ago, the indicative gross rental yield received today would be better than if the property was purchased at current prices. Again, in the majority of instances (12 out of 20) the yield would be the same if not lower than it was 12 months ago however, every single suburb has recorded growth in median price of units.
The results highlight the importance of timeliness in any property investment decision as well as highlighting the importance of doing the numbers in order to understand what return you will get and factors which will possibly impact on that return. It also highlights the importance for any property investor, or any type of investor for that matter, of having a clear understanding of what they want from the investment. Before any purchase the buyer must determine do they want price growth, rental return or a combination of both.
Of course hindsight is a wonderful thing and nobody thought we would see such strong value growth during 2009. It is interesting to see the impact that this value growth has had on those with investment properties.
During 2010 it is anticipated that the rate of growth in the value of properties will slow as interest rates likely climb higher and Government stimulus is removed. Investors are likely to continue their shift back into the market due to the fact that they will likely have more negotiating power and much less competition from first home buyers. With the rate of value growth slowing and interest rates higher it will likely be more difficult for first home buyers to enter the market and as a result, the rental market is expected to tighten creating upwards pressure on rental rates and in turn improving gross rental yields.
|
|
|
|
|
| | |
|
