Falling Melbourne rental yields suggest caution, reveals research model

With rental yield being a key metric for a buyer, seller, investor or renter, researchers from the University of Melbourne have created a system to model and predict house values and rental rates at the individual property level.

The comparison of these two values offers insight into rental yields in the market.

Dr Gideon Aschwanden and Dr Andy Krause from the Melbourne School of Design in the Faculty of Architecture, Building and Planning said rental yields are a critical driver of rental and housing costs and often a key indicator of property bubbles. 

“In this volatile Melbourne property market, buyers want to ensure the safety of their investment. Our recent analysis of property sales and rental returns will better inform investors with location information, helping them to invest their money more securely,” said Dr Aschwanden.

By understanding changes in yields, measures can be taken to help prevent or dampen a sudden collapse in the market, according to the researchers.

Buyers' decisions are driven by costs. With first time homeowners renting out their property to payoff the mortgage to the point where they can afford it they need to estimate their rental income and property yield. 

Using a unique data set of home sales and rentals from the Australian Property Monitors, they investigated the spatial and temporal changes in residential rental yields across the Melbourne metropolitan region from June 2010 to June 2015.

Using data supplied by Domain, they matched properties that have been both sold and rented during the study period.  

After adjusting for market changes, these two observations were compared, to develop a property-specific estimate of rental yield. 

“Starting with the entire metropolitan region, we then calculated yields at the level of local government area (LGA), statistical local area level 1 (SLA1), post code, suburb, and at a property-specific level,” said Dr Aschwanden. 

“Looking at the entire metropolitan region, our rental yield calculations allowed us a direct look at variations by neighborhood, street and even specific building, in the case of apartments,” he said.

The analysis showed that apartments offer higher yields than detached houses. This difference has widened over time, with yields from houses falling off >0.5 percent from June 2013 to June 2015 while yields on apartments have held somewhat steady since 2013.  

“Looking at influencing factors location shows the highest impact. Within the metropolitan area of Melbourne a 6 percent spread of rental yields ranging between 1.5 percent and 7.5 percent is visible. This is much higher than the decline of 0.5 percent observed over the last 3 years or the impact of distance to train stations of 0.5 percent.”

Evidence showing variation within postcodes would help investors reach a decision on whether to purchase a property, they said. Changes within and between localities may also have a big impact on returns than changes over time.