Less investor demand likely for property due to lower capital gains outlook: RBA

Despite the attractiveness of lower interest rates and higher rental yields, the RBA expects less investor demand for investment property in coming years due to "lower trend capital gains".

This was noted by Luci Ellis, the head of RBA's financial stability department in a speech on the outlook for the property and mortgage markets delivered at the Citibank Property Conference in Sydney today.

Ellis presented the following chart at the Citibank Property Conference in Sydney today showing how rental yields, as measured by both RP Data and the Real Estate Institute of Australia, have been trending upwards while 10 year government bond yields have dipped. 

“With slower trend growth in housing prices, total returns on rental properties would fall unless other things adjusted, said Ellis.

“Sure enough, rental yields, which are a real yield, have been rising in recent years. 

“They are now back to a level that seems like a more reasonable spread over long-run average indexed bond yields, given the investment risk. (And when you consider the current level of indexed bond yields, the rental yield looks even more attractive.),” said Ellis, who heads up the RBA's financial stability department. 

"But for given interest rates and rental yields, lower trend capital gains should result in less investor demand than we saw in the past couple of decades.

“Presumably this will also bring forth less construction activity than we used to see at a given level of interest rates," she said.