Weekly rents have increased by 3.5% over the past year while value growth has been moderate and there has been virtually no change to yields yet investor activity in the housing market is ramping up , this week we examine why this is occurring.
Rental growth over the past 12 months across the combined capital cities has outpaced home value growth however, it has not been significant enough to see any substantial improvement in rental yields over the year. According to rpdata-Rismark data on rental growth between December 1995 and April 2013, rental rates have never fallen on an annual basis.
Over the 12 months to April 2013, capital city rental rates have increased by 3.5% for houses and 3.3% for units; a relatively measured rate of growth but higher than inflation. Across the combined capital cities median weekly rents are recorded at $474/week for houses and $440/week for units.
Looking at capital city rental rates compared to capital city value growth shows that over the period from April 1997 to April 2013, overall growth in home values has been significantly greater than growth in rents. Rental rates have increased by a total of 82.3% compared to a 218.4% increase in home values over the same period.
Despite the comparatively lower level of value growth for rents, over the past five years rental rates have increased at an average annual rate of 5.0% compared to much more sluggish growth of 2.0% each year for home values. The data would seem to indicate that despite the fact that value growth has been comparatively slow over the past five years, there has still been strong demand for housing which is reflected in the comparatively strong increases in rents.
The third chart highlights the performance of gross rental yields across the combined capital cities compared to annual growth in combined capital city home values. The second chart showed that between 1997 and 2004, rental growth was significantly lower than value growth, as a result there was a substantial compression of gross rental yields over that period. Between 2004 and 2013, home value growth has generally been much slower than over the previous period and subsequently there has been no further significant movement in gross rental yields.
Gross rental yields have recorded only a minimal change over the past year. House rents have increased from 4.1% to 4.2% over the year to April 2013 while unit yields have remained unchanged at 4.9%.
Recent housing finance data from the Australian Bureau of Statistics (ABS) suggests that investors have been flocking back into the housing market. The headline figures of 2.7% annual growth in capital city home values and gross rental yields of 4.3% would suggest there is little reason for such activity however, when you consider that the official cash rate at April 2013 was just 3%, it appears that investors have been chasing yield and are positioning for long term capital growth, rather than keeping their money in the bank earning very little interest.
The fourth chart highlights why investor activity has likely increased recently with the basis point spread between the cash rate and rental yields at its greatest level since January 2000. The current spread for capital city dwellings is 127 basis points. For houses it is slightly lower at 118 basis points however, for units it is significantly higher at 189 basis points.
Since the April 2013 rents and yields data was released, official interest rates have been reduced by a further 25 basis points to 2.75% in May. With the return on cash at bank falling further in May it is likely that investors will increasingly look for different ways to obtain a return on investment; clearly at the moment investing in housing is one way to secure a superior return. With lower interest rates and home value growth remaining moderate we would expect that the basis point spread between official interest rates and gross rental yields on houses to increase further over the coming months which would subsequently make investing in housing potentially even more attractive for those investors focussed on yield.
Article by rpdata senior research analyst, Cameron Kusher