Rental yields falling but investor demand continues: QBE
Rental property yields are at decade lows in some Australian cities but cheap mortgage rates, weak returns on other investments and the anticipation of capital gains are expected to further increase investor demand for residential property in the coming year.
Yields on three-bedroom rental properties fell in 2013/14 in all capital cities except Adelaide, where they were stable, according to the QBE Australian Housing Outlook 2014.
Rental yields fell below 3% in Sydney and Melbourne as prices increased strongly, while price rises also cause yields to fall in Brisbane to just above 4%, the report found. It noted that house prices rose by 17% in Sydney, 20% in Melbourne and 6% in Brisbane.
The report attributed lower yields in Perth, Darwin, Canberra and Hobart to weaker rents in those cities.
Rental growth in Perth and Darwin slowed to 2.9% and 4.8% respectively in 2013/14 following 7.5% increases in the previous year, the report found.
Accommodation supply in both cities is rising, while migration and mining investment is slowing. That was expected to put further downward pressure on rental growth in 2014-15.
Canberra has also experienced a boom in new rental supply which has pushed vacancies rates above 4%. The report noted that the ACT is estimated to be already experiencing an excess of dwelling stock.
Despite falling yields, investors have been active buyers of residential property and the trend is expected to continue.
The value of finance for residential investment has been between 45% and 50% since March 2014, up from just under 40% of total residential finance in the year to June 2011, the report found.
All states except Tasmania and the ACT reported an increase in lending for residential investment in 2013/14. NSW was the strongest state for investment lending growth, rising by 43% over the previous year to $49 billion.
"Low mortgage interest rates mean the gap between rental yields and interest rates in most capital cities remains narrow in a long term sense... This narrowed gap, together with the emergence of capital growth in many capital cities in 2013/14, is expected to remain attractive to investors and drive further increases in investor demand across most states over 2014/15," the report said.