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Capital City Rental Yields Pay The Price Of Value Growth

rental yieldIf the value of your home shoots up from $500,000 to $550,000 and the rent you ask for it remains the same, what gets eroded in the process is called rental yield. You know the grind. Cameron Kusher for the property Update suggests that gross rental yields in capital cities are expected to fall further in near future with home value growth decidedly outperforming rental growth.

Home Value index

RP Data’s Home Value Index confirms that while detached homes and units in capital cities have gained in values by 5.7% and 4.4% respectively over the last year, rental growth has been thinner, posting 3.1% for capital city houses and 2.6% for its units.

Barring two troughs, home value growth always on top of rental growth

Kusher asserts that barring two occasions (2008 and 2011-12) when home values substantially weakened, rental growth has never outpaced home value growth. While it is true that rental growth has never exhibited annual fall, their rise has never been something to write home about either.

All through 2000’ retal yields declined significantly, pressurised by the hike in value growth. The scene, as has been pointed out earlier, only changed twice, largely due to property market slumps. Presently, we are again witnessing an erosion of rental yield.

More houses will mean less rental rates

Rental growth for Sydney has been 3.6% this year. With the number of home buyers on a rise, rental pressure is bound to diminish. With more houses available on rent, it is less likely that owners will be able to fetch high rental rates. It is then natural to expect that rental yields will further diminish, more so because home value growth is in no mood to relent.

With weak rental returns to fast become a norm, investors will set their sights on capital gains. This strategy may flatter to deceive because a hike in interest rates will weaken value growth and subsequently affect capital gains, contests Kusher.

You can read the original article here.

Interest rate correction to affect value growth/capital gain

The cost of borrowing is at its minimal best for investors today, thanks largely to the low interest rate environment. This has created strong grounds for high value growth. This tide may turn soon. After all, the shrinking gap between fixed and variable rates is ample proof in support of correction in the interest rates. As and when that happens, value growth will decline, once again pushing rental yields up.

Investors, forever grappling between two parallel ideas- rental yields and capital gains– will do well to act prudently and ponder over the aspect of negative gearing before they make their move.

When do you foresee an interest rate correction?