Investors in the Australian residential property market are forgoing rental income while they chase capital gains – as rising house prices push rental yields lower.

According to the RP Data September 2014 Quarter Rental Review, median weekly rental rates for both houses and units across the capital cities remained unchanged in the quarter to September. The median rate was recorded at $430 for houses and $420 for units. 

RP Data national research director Tim Lawless said investors should be aware that they won’t be getting much income from their investments.

“Investors entering the rental market need to be aware that rents aren’t rising anywhere near the pace of capital gains which is pushing rental yields lower, particularly in Sydney and Melbourne where values have increased the most at a time when rents aren’t doing comparatively much at all,” he said.

On an annual basis, the national rental rate for houses and units increased by 1.3%, while in the capital cities house rents remained flat at 0% growth and unit rents increased by 2.4%. 

Adelaide recorded the strongest annual growth in house rents at 2.8% while Melbourne recorded the strongest annual growth in unit rents at 2.8%. The Canberra market recorded the weakest annual growth for both the housing and unit rental markets, at -4% and -6.7% respectively. 

According to Lawless, the surging investor demand the Australian property market has witnessed could be responsible for pushing rental yields lower. 

“The performance of rental markets are diverse, however the common theme is that generally the rate of capital gain is outpacing the change in weekly rents which is driving rental yields lower. This is happening at a time when investment demand is at record levels and trending higher, which highlights that most investors are focussing on capital gains and ignoring the low yield scenario. The softer rental conditions are likely the result of the surge in investor related activity which is seeing more rental supply hit the market,” he said.

Although, other recent data published by RP Data revealed that property prices have cooled over September, recording a 0.3% fall in property values across the five largest capital cities over the first 26 days of September.

So as rental yields remain relatively unchanged, capital gains diminish and the Reserve Bank openly stating it will be keeping its eye on the surging investor market – the reign of property investment may be coming to end.