Keep your eye on gross rental returns: Mark Bouris

After another week of official interest rate decisions and rebounding house markets, it’s time to put property into perspective.

Most of what we read about property prices and values is of a short term nature – it allows us to track a market by sales.

In the latest release, RP Data-Rismark’s August home value index shows that Sydney house prices rebounded 5.4% in the three months to August, and in Melbourne they’d gained 4.8% over the same rolling quarter.

The average of the eight capital cities was 4.0% gain in house value over the quarter.

However, property is a long term investment so I look at property numbers that reflect deeper value and take in metrics other than price. For instance, RP Data’s total gross return. This is a number that shows property value not in averaged sale prices, but as rental income plus capital gain.

Total gross returns are crucial for landlords, investors and for self-managed super fund members, however it’s a measure that everyone should look at prior to entering the property market.

In the RP Data Index for August the best total gross return of residential property over the year to August was 14.5% in Perth followed by Sydney on 11.7%. Melbourne – in spite of some weak property results in the past two years – managed a yield of 8.3% on residential property in the year to August.

RP Data says the total gross return on residential property in the year to August, across the eight capital cities, was 9.9%. This is a solid result for property.

There are reasons to look at property yields.

Firstly, yields are a less volatile measure of a market than prices. When house values are low, rental income can reinforce the investment, and when the market is roaring – pushing housing supply into the market – lower rental income can be compensated by capital gain.

The second reason to look at gross yields is that it reflects a true measure of value. House prices show you what the market was prepared to pay in a given month. But capital gain plus income is a more sustainable measure of your expected returns over time.

RP Data’s Cameron Kusher has interesting figures in terms of house prices versus total gross return: in October 2010, Australia’s housing market peaked. But when it eased off, house values dropped until May 2012, and have not returned to peak levels.

But when total gross returns peaked in October 2010, they simply went flat until May 2012, and have been climbing ever since. Total gross return acknowledges a small hedging effect against price fluctuation – it shows deeper value.

And remember, even if you live in your house, it still has a rental value – it’s just a value you take in kind, not in cash.

So, when investigating a house market, start with prices but keep your eye on gross total returns.