Rise in dwelling values comes with squeeze on rental yields

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Australia’s capital cities are on the rise once again with a combined 0.3% increase in February taking home values to 8.3% higher over the past 12 months, according to the CoreLogic RP Data February Home Value Index results.

Sydney led the charge with another 1.4% gain to a total of 13.7% growth year on year. Since the growth cycle started in June 2012, Sydney has seen values surge by a total of 34.8%.

In contrast, Perth continued its poor showing, with property values dropping by 2.2% in February. During the past 12 months to February, values have grown by a paltry 0.6%.

CoreLogic head of research Tim Lawless said the recent result clearly shows a moderation in price growth despite the interest rate cut in early February.
 
“The slower rate of capital gain in February may come as a surprise to some who were expecting lower mortgage rates to instantly propel the pace of home value growth higher,” he said.

“We might not see the lower interest rate environment stimulate the housing market as much as it has in the past. Weaker jobs growth, higher unemployment, declining affordability, low rental yields and political uncertainty are all factors that could dent consumer confidence and provide some counter balance to the rate cuts and quell any additional market exuberance.”

The continuing growth in prices, albeit slower, has started to put considerable pressure on rental yields as rents struggle to keep up with the price gains.

Typical gross yield has dropped from 4.3% to 3.7% at the end of February.

“We have seen capital city dwelling values rising at more than three times the pace of weekly rents. The bi-product of such strong capital gains and relatively weak rental growth is that rental yields are being forced lower and lower,” said Lawless.

Darwin remained at the top of the heap with houses showing a gross rental yield of 5.9%. Hobart was close behind on 5.3% with Brisbane following on 4.5%. Melbourne has the lowest rental yield at just 3.3% while Sydney is not far behind at just 3.6%.

Despite the lower rental returns, Lawless noted that investors are still active in Australia’s biggest markets.

“With housing market investment now roughly level with owner occupier demand (based on housing finance commitments), it is clear that investors, particularly in Sydney and Melbourne where investor activity is most prominent, are speculating that capital gains have further to go and are ignoring the low yield profile of these cities. While this may be a successful strategy in the short-term we would suggest a focus on both capital growth and rental return is a safer and more sound strategy overall,” Lawless said.
 
 

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