Rental yields dive

Rental markets in parts of Australia witnessed volatile times recently with yields taking a dive in some areas as capital gains outpaced rental growth. One of the biggest surprise falls in rents was in the resource-rich mining town of Collinsville in North Queensland, where housing yields fell by 2.4% from a yield of 9.1% last year to now record 6.7%.

Garden Suburb in Newcastle followed with a fall in its yield of 2.3% – an additional 18 suburbs also experienced similar falls.

For units, Cromer in NSW had the greatest decline with a fall of 2.5%, followed by South West Rocks which fell by 2.3% and a fall of 2.1 % for the inner city northern Sydney suburb of Greenwich; 17 other areas also experienced a drop.

A feature of the property market during 2009 was the strong value growth in several capital cities, the significant contribution in first home buyer activity, falling rents and subsequent yield erosion.

For most areas, rental yields eased over the past 12 months 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 property prices higher and rents on par or even lower than what they were a year ago, the return from property investment is generally not as strong as it was 12 months ago.

In particular, the analysis has confirmed that over the past six months the fall in rents and erosion in yields have been significantly more noticeable as property value growth ramped up.

In towns like Collinsville, the median rental rates in the suburb have actually fallen by -20.0% during the year and house prices have increased by 8.7%.

Based on the analysis on changes in rents, it is worth noting that if a property was purchased at last year’s prices (prior to the 8.7% increase) and was now receiving current rents, the indicative gross rental yield would sit at 7.2 %.

While not as strong as the 9.1% yield last achieved year, it is much better than the current yield of 6.7%.

Across the entire 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 and owners have witnessed an increase in the median price of properties within the suburb.

The results highlight the importance of timeliness in any property investment decision.

During 2010 the rate of growth in the value of properties will slow as interest rates are mooted to climb higher and the government stimulus in the form of the first home buyers grant boost 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.

Cameron Kusher is a research analyst at RP Data.