Why Australian Property Rental Yield Is at a Record Low

Last week, CoreLogic [NYSE:CLGX] released their monthly report on rental rates. It wasn’t good news — at least, not for property investors.

Over the past year, rental rates increased at the slowest rate on record.

Average rent went up just 1.5%.

Rent rose the most in Hobart, with landlords getting 3.2% more compared to this time last year. Sydney was close behind, with 3.1% year on year growth. Melbourne and Brisbane trailed with 2.3% and 2.0% respectively.

Average rents fell significantly in Darwin, down by 5.5%. But Darwin is still one of the most expensive cities to rent a home in, with average rent at $567. That’s just behind Sydney ($595).

Perth rents also went down, by 4.5%. There was a negligible drop in Canberra, where average rents went down by 0.6%.

The month-on-month changes were also remarkably slow. Average rent across Australia rose just 0.1%.

Why the rental yield stats are disappointing

You’d think that any growth at all would be good. But a little bit of growth is not enough. Not when house prices are growing much faster.

Average rental yield is down 0.3% to just 3.7%.

You might be thinking that higher house prices don’t affect people who’ve bought their investment properties a while ago. But it’s important to remember that the higher house prices go, the more attractive and reliable houses look as investments. The more investors and investment properties there are, the more competition there is to attract tenants. Which means rents are lower. It’s a bit of a cycle.

Even with negative gearing, it’s a struggle for some property investors. You can’t claim losses from negative gearing until the end of the year. But expenses like repairs, maintenance and rates need to be paid as they fall due. With lower rents, this can cause serious cash flow issues.

What CoreLogic says

The report says that ‘The sluggish pace of rental appreciation can likely be attributed to the ongoing boom in dwelling construction across Australia’s capital cities accompanied by record high participation in the housing market from investors. Most of the new capital city housing stock is units and this type of stock is much more likely to be owned by investors providing additional rental options across the capital cities.’

In other words, there are lots of new dwellings and lots of investors. So it’s a renter’s market out there.

And lots of those new dwellings are city apartments. Which means renters have even more choice right in the heart of our capital cities.

The report also said that ‘We may be starting to see the early affect [sic] of the surge in new apartment stock and the ongoing rise in investment purchasing resulting in additional unit stock for rent.’

This makes sense when you look at the changes in rents over the past quarter. Over the past three months, the average rent for a house has grown at triple the rate for a unit.

Is there really a ‘supply surge’?

When the report talks about a supply surge, they’re not just talking about the number of new dwellings being built.

They’re talking about the number of dwellings that are being made available as rental properties. And that is going up a lot. This is because of the strong demand from investors.

More investors are buying properties than ever before. Around 500,000 dwellings change owners each year according to the RBA. The latest housing finance stats from the ABS say that loans to investors make up over 40% of the value of all mortgages. And that number is growing all the time. The ABS stats say investor loans grew 0.1% faster than owner occupied housing over the last period.

So every year, more new and established dwellings become available as rentals, thanks to investors. Even though some investors sell to other investors, the total number of rental properties grows.

Then, there’s the apartment building boom.

The ABS released the latest stats on building approvals two weeks ago. The stats say that approvals for ‘private sector dwellings including houses’, i.e. apartments and units, are up by 35.9% compared to this time last year. To put that in context, approvals for houses only went up 4%.

In total, nearly 9,000 new apartments and units were approved. And that’s just for the month. So there are tens of thousands of new apartments and units coming on to the market in Australia every year.

Of course, some of that is balanced out by population growth. Last year, the ABS says Australia got 354,600 new people, from natural growth and from migration. But the last Census says they’re not moving in to apartments. The average number of people per household stayed flat at 2.6. So larger families — three or more people — who are renting, have fewer properties to choose from. But smaller families — couples and singles, or single parents with one child — have more to choose from.

What investors are looking for

Investors aren’t looking for rental growth. They just want the value of their property to keep going up. And they believe it will.

That’s what’s making property investment ramp up, even as rental yields go down.

People rely heavily on negative gearing. They make their buying decisions based on projected price growth. But there’s no guarantee that prices will keep rising as sharply as they have over the past ten years. In fact, it’s not even likely.

Some investors buy and sell quickly, hoping to make a quick buck off short term price rises. These kind of investors aren’t interested in maintaining or improving a property. They’re not interested in attracting a good long-term tenant. They’re not even interested in looking after the tenant while they’re there. After all, they only have to hold the property for more than 12 months to get the capital gains tax discount.

There’s a saying amongst investors and their advisers: ‘capital growth is king’. To this end, hundreds of organisations publish resources on ‘the best place to invest’ and ‘the fastest growing suburbs for housing’. As though past growth is a definite indicator of future growth. Some firms sell reports predicting capital growth over five years and longer. But these reports aren’t nearly as comprehensive as they should be.

So the reason rents aren’t rising is because landlords aren’t focused on combating rising supply by adding value for potential tenants.

The thing is though, investors have every right to do this. Because the law says they can. For this to change, the property industry would have to be much more heavily regulated. Capital gains tax rules would have to change. Tenants’ rights would have to be more strictly enforced.

Also, ASIC would have to have more power to go after dodgy property spruikers responsible for stirring up speculative investment. They already go after firms that they see as providing a form of financial advice, through promoting potential capital growth figures. They can prosecute them for providing advice without a license, or for not providing clients with enough information.

Responsible property investment

A small proportion of property investors are in it for the long haul. They’re there for the capital gain, but also for the long-term rental income. Some have property portfolios because they believe the income will help fund their retirement.

So what’s the critical level for them? How low would rental growth have to be for these mum-and-dad investors to be affected? How many long-term investors could stand a drop in rental yields? These questions may not be answered for years to come. Or at least, not until the next election, where property market regulation will be a hot topic.

Of course, there are simpler ways to invest in property. You can get exposure to the property market via the stock market. In his report ‘5 Things You Can Do In The Next 30 Days to Boost Your Retirement Pot’, Kris Sayce explains exactly how it’s done. He even suggests one listed property fund he believes is especially reliable. Click here to find out how to get your free copy.

Eva Mellors,
Contributor, Money Morning

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