Flow on effect of rising home value is slowing rental growth and falling yields

While a rise in home values across Australia’s property market has been welcome news for Sydney and Melbourne property owners in particular, the flow on effect hasn’t been so favourable for rental growth and yields.

Rental growth has slowed markedly and rental yields are falling as value growth significantly outpaces rental growth.

The May RP Data-Rismark Home Value Index reported that combined capital city home values increased by 11.5%. At an individual capital city level, value growth ranged from 1.2% in Canberra to a 16.7% rise in Sydney. Australia’s combined capital cities recorded an increase in rental rates of 2.4% over the past year.

Sydney, Melbourne and Hobart are the only capital cities where rental growth was greater over the past 12 months than for the previous 12 months. At the other end of the spectrum, growth slowed across five of the eight capital cities with Perth experiencing the most extreme slowdown.

Over the 12 months to April 2013, Perth rental rates had increased by 10.4% compared to a -0.5% fall over the most recent 12 months. Sydney was the only city to record an increase in rental rates higher than inflation; up 3.7% over the past year.

With a large percentage of loans now going to investors at a time when the rate of rental growth is slowing would suggest that most investors are chasing capital growth rather than rental return. When you consider that the value growth in our two largest cities (Sydney and Melbourne) has been so strong over the past year, it’s no surprise.

Comparing annual value growth and annual rental growth across each capital city, home values rose at a faster pace than rental rates and as a result, rental yields experienced a fall over the year.

It wasn’t surprising to see that the greatest differences between home value growth and rental growth have been recorded in Sydney and Melbourne.

As a result of values rising faster than rental rates, gross rental yields have fallen over the past year across each capital city. The largest falls in yields have been experienced across Sydney and Melbourne where value growth has been strongest. These two cities also have the lowest yields of all capital cities at 3.9% and 3.4% respectively.

This highlight that as home values rise, the level of rental growth has not been able to keep pace.