Sydney rental yields head lower to 3.6%: CoreLogic RP Data

Sydney rental yields head lower to 3.6%: CoreLogic RP Data
Jonathan ChancellorDecember 7, 2020

Sydney might take over from Melbourne as having the lowest gross rental yields across the capital cities, CoreLogic RP Data research director Tim Lawless said.

The possibility arose as Tim Lawless noted the latest month on month results showed a moderation in the rate of dwelling value growth compared with the December and January movements.

Australia’s combined capital cities have seen dwelling values rise by a further 0.3% in February taking home values 8.3% higher over the past 12 months.

Source: CoreLogic RP Data Home Value Index, as of 28 February 2015

The monthly rate of growth however slowed from 1.3% in January and 0.9% in December, although the growth trend remains strong, particularly in Sydney and Melbourne.

“The slower rate of capital gain in February may come as a surprise to some who were expecting lower mortgage rates to instantly propel the pace of home value growth higher," Lawless said.

"We are already seeing the effect of lower mortgage rates, with auction clearance rates surging to the highest levels we have seen since 2009 and valuation activity across CoreLogic RP Data valuation platforms reaching new record highs based on daily averages over the second half of February.

"Despite the flurry of activity, it will likely take some time combined capitals to see this flow through to a higher rate of capital gain."

Evidence of compressed rental yields was continuing across each of the capital city markets, the February report noted.

A year ago the gross rental yield for a capital city dwelling was averaging 4.3%; by the end of February the typical gross yield has been eroded down to just 3.7% - due largely to the consistent high rate of dwelling value growth relative to rental growth.

According to Lawless, over the current growth cycle to date, we have seen capital city dwelling values rising at more than three times the pace of weekly rents.

"The bi-product of such strong capital gains and relatively weak rental growth is that rental yields are being forced lower and lower,” he said.

In Melbourne, the yield profile is the lowest of any capital city with the typical Melbourne dwelling showing a gross yield of just 3.3%. Sydney wasn't too far off, recording a gross dwelling yield of 3.6%.

Lawless noted that if we see Sydney dwelling values continuing to outpace rents so quickly "we may see Sydney take over Melbourne to show the lowest gross rental yields”.

Lawless said the total return across the housing market (ie capital gain plus gross rental yield) provides some explanation about why investors are so active across the Sydney housing market.

"Total returns in Sydney are approaching the 20% mark over the past twelve months, substantially outperforming other asset classes," Lawless warned.

"Importantly, even though dwelling values aren’t rising as quickly in Brisbane, the total return is almost equal to Melbourne’s, at 10.9% in Brisbane compared with 11.1% in Melbourne, thanks to the healthier yield profile of the Brisbane market.

“With housing market investment now roughly level with owner occupier demand (based on housing finance commitments), it is clear that investors, particularly in Sydney and Melbourne where investor activity is most prominent, are speculating that capital gains have further to go and are ignoring the low yield profile of these cities.

"While this may be a successful strategy in the short-term we would suggest a focus on both capital growth and rental return is a safer and more sound strategy overall.”

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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