Following last week’s 10 year retrospective on capital city home value growth we undertake a comparison with the rental growth performance over the same period.

Over the past two decades rental yields across the combined capital cities have been gradually trending lower and currently sit at record low levels. Meanwhile, the change in rental rates has also been slowing in recent years which has culminated in no change in rents over the past year. This represents a historically weak market for rental growth.

Looking at a 10 year retrospective for rents shows that across the combined capital cities, rental rates have increased by 50.7% over the period, or 4.2% per annum. This is a lower level of increase than home values which have increased by 72.0% (5.6% per annum) over the same period. Looking at the split by property types, there hasn’t been a substantial difference in performance, with house rents increasing by 50.3% compared to a 53.7% rise in unit rents.

Annual change in rents vs monthly rental yields

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If we breakout the results across the individual capital cities and look at the total rental change over the past decade it shows that Sydney (+59.4%) and Perth (54.6%) have seen significantly greater increases in rents than all other capital cities. Although rental growth has been strong in some cities, in most instances home value growth has outpaced rental growth over the past decade. The exceptions have been Hobart and Perth where rental increases have outstripped value growth, pushing yields higher over the decade, and Brisbane where value growth and rental growth have each been recorded at 44.0% over the decade.

Cumulative change in capital city home values and rental rates, 10 years to Jan-16

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The other side of the rental growth equation is of course gross rental yields which highlight the expected annual rental return on an investment property. There are a few points that should be highlighted, they are based on the home value so no consideration is given to borrowings nor are there allowances for costs. Furthermore, the calculation assumes that there is no vacancy, which in the current environment is becoming somewhat more difficult to achieve.

Over the past 10 years there has been little overall change in gross rental yields across the capital cities. Although capital city rental yields are now at an historic low of 3.5% the shift from 4.0% 10 years ago has been relatively minimal. Perth and Hobart are the only cities in which yields are now higher than they were 10 years ago while in Brisbane they are unchanged over the period. Melbourne and Darwin have seen the greatest softening in gross rental yields over the past decade. Melbourne, where gross yields are the lowest of any capital city, have slipped from 4.2% ten years ago to 2.9% currently.

Gross rental yields Jan-06 vs Jan-16

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With rental rates falling and yields sitting at record low levels at a time when housing construction is at its highest level on record it is reasonable to expect that rents and yields will slip further over the coming years. Of course we have recently seen the Labor opposition propose changes to negative gearing and the capital gains tax discount. Were policies such as these to be implemented it could change the situation for investors. Whereas over recent years their focus has clearly been on value growth, attention could begin to become more balanced where investors place a higher degree importance on the yield profile and potential for positive cash flow.