Rental returns are softening across many markets, thanks to surging property prices according to new reports.

The APM’s latest Rental Price Series Quarterly Report revealed that rents in most capital cities were either flat or fell over the March quarter.

However, due to increases in both Sydney and Melbourne, nationally median weekly asking rents for houses increased marginally by +0.2% while unit rents rose by +1.7%.

Although Sydney house rents, which have not increased since 2012, remained flat at a median weekly asking rent of $500, the median weekly asking rent for units increased to $490.

APM’s Andrew Wilson said these record unit rent increases – which meant units were fast approaching parity with expensive houses - were due to affordability barriers on house rent growth.

“In Sydney, affordability constraints, together with growing preferences for inner-city apartment living, have seen rents move to a point where the median asking rent for a unit is just $10 less per week than a house.”

In Melbourne, both house and unit rents grew over the March quarter. House rents increased by +1.3%, while unit rents recorded +4.3% increase.

Wilson said while Melbourne had reversed the recent lengthy trend of flat or falling rents, rises were coming from a low base in what remained a generally tenant-friendly market.

In Brisbane, new inner-city apartments were putting downward pressure on rental growth. Over the quarter, unit rents fell by -1.3% while house rents stayed flat.

In Perth, house and units rents remained flat over the March quarter after an unsustainable period of growth in 2013.

Adelaide, Darwin, Hobart and Canberra all recorded flat or falling rents for houses and units over the quarter.

Wilson said the choppy capital city rental market performances reflected increased home buying activity, which was due to improvements in housing affordability over the past year.

The mixed results could be expected to continue throughout 2014 as prices growth moderated in most capitals, he said.

“In Sydney, Melbourne and Brisbane, low numbers of FHBs may be creating some demand-based rental pressure. But increased supply through rising investor activity and new apartment building will continue to impact on rental growth in these cities.”

Capital city rental yields also recorded mixed results over the March quarter.

Sydney and Melbourne continued to generate the lowest yields, for both units and houses, of all the capitals, while Brisbane still provided investors with the highest yields for both houses and units.

However, Wilson said that with Brisbane prices growth likely to accelerate this year, there was likely to be increased house investor activity and yields might weaken.

Meanwhile, RP Data’s latest Quarterly Rental Review also showed that rental markets had remained relatively flat, with little to zero growth in some markets, over the March quarter.

RP Data’s Cameron Kusher said that, with home value growth comparatively strong, they were seeing a deterioration of rental yields in most capital cities. 

“We expect rental growth to continue at moderate levels over the coming year, due to the climbing demand for housing which is highlighted by escalating sales transactions nationally.”

The slowing of rental markets in some of Australia’s resource intensive areas could be attributed to a downturn in overall housing market conditions in those regions, Kusher added.