The rundown on rental yields

20th Oct 2015By: Tim Lawless

While dwelling values in Sydney and Melbourne continue to show double digit annual growth, weekly rents have remained sluggish across all of the capital cities. The headline figures from the latest CoreLogic RP Data rental report covering the September quarter showed weekly rents across the combined capital cities were flat, taking the annual pace of growth to a new record low of just 0.5%.

Melbourne

The strongest rental growth over the past year was in Melbourne, where weekly rents were 2.1% higher. When taken in the context where dwelling values in Melbourne are up by 14.2%, it is clear why Melbourne rental yields are the lowest of any capital city. A typical Melbourne house is providing a gross return of just 2.9%, while units are showing a higher 4.1% average gross return across the city.

Sydney

Similarly, in Sydney, where dwelling values have surged 16.7% higher over the year, weekly rents are up by only 1.9%. The result is that the average gross rental yield for Sydney houses has reduced from 3.6% a year ago, to reach a new record low of 3.1% at the end of September this year. The average gross yield for unit rents has reduced from 4.5% a year ago to 4.1%.

Rental rates moved lower over the year in both Perth and Darwin, down by 5.8% in Perth and by a substantial 11.4% in Darwin. Dwelling values are also heading south in these cities, however not at the same pace as rents which means rental yields are being pushed lower in these cities as well. Over the past twelve months, Perth dwelling values fell by 0.9% and Darwin values were 3.9% lower.

The exception to the rule

The only capital city where rental yields aren’t being compressed is Hobart. Weekly rents in Hobart are rising at a faster pace than dwelling values which are down slightly over the past year. Hobart is now showing the second highest yield profile across the capital cities after Darwin. In fact, it may not be long before Hobart overtakes Darwin as the highest yielding capital, considering the pace of rental falls across the Darwin market place.

What’s behind the slowdown?

The landscape of weak rental growth can probably be attributed to the combination of higher levels of housing supply as well as a surge in rental stock in line with the high level of investment activity that has been apparent across the country. Add to that lower levels of population growth (particularly in the mining related regions) and the picture for rental demands becomes relatively bleak.

Soft rental conditions is great news for renters, but not so great for landlords. I suspect there will be more efforts to push rents higher as capital gains start to taper and when interest rates start to rise. Whether the market will accept higher rents in the face of more housing supply remains to be seen, but one suspects that most renters won’t accept this and will shop around for better rental deals.