House rental yields fall as property prices soar across the country: Domain Rent Report

Rental yields have dropped in most Australian capitals, new data shows, with booming house prices clipping rent profits and forcing investors to rethink where they will buy. 

Though many have traditionally looked to invest close to their own capital cities, some are now looking further afield, experts say, investing regionally or in other states to get better returns.

The COVID-19 affected markets in Sydney and Melbourne have suffered big drops in rental yield, as international students are kept out of the country, but at the same time median house prices have soared well past $1 million.

That saw Sydney’s house rental yields take the biggest fall over the September quarter, dropping by 3 per cent and by 9.3 per cent across the year, Domain’s latest rent report showed.

Likewise in Melbourne – which in September became the cheapest city in which to rent a house – house rental yields fell by 0.4 per cent over the three months to September and 4.3 per cent over the year.

Further north in Brisbane, yields also fell by 1.1 per cent over the September quarter and 4.2 per cent across the year, data showed, as median house prices continued to soar past $680,000.

Melbourne buyer’s advocate Cate Bakos said it was no surprise that rental yields were down across the capital cities given the double-digit growth in house prices across the year.

“House prices have definitely outstripped rental yields,” Ms Bakos said. “It’s not surprising given house prices have moved by 20-something per cent this year.”

However, it wouldn’t stop investors getting into the market. Many would be looking to invest for capital growth – the profit they get when selling their investment house – rather than the yield from rents, she said.

With prices flying, yields fell in most capital cities across the quarter,  Domain data showed, but not in Darwin. Yields there rose 1.9 per cent as rents surged by a huge 25.3 per cent, far above the jump in the city’s house prices.

Aus Property Professionals director Lloyd Edge said though Darwin’s yields looked good, most investors were wary of buying property there and were instead looking in regional areas including in NSW where the state government is now pushing to scrap capital gains tax breaks for investors.

“What I’m seeing at the moment is people are going to the regional centres like Newcastle, Orange or Albury because there is nothing like it in the city and there are much higher rental yields,” Mr Edge said. “Those with a bigger budget tend to buy two properties rather than just one.”

Property investors were also looking to cities like Adelaide, where they could get a bigger bang for their buck, he said. They were not investing as much as they once had in Sydney, or Brisbane, where yields were also falling and house prices soaring.

Brisbane’s rising house prices were stopping some investors from buying closer to the Brisbane CBD, Property Zest founder and principal Karen Young said.

“Every suburb’s house prices have gone up in the past six or nine months – sometimes people are getting priced out of houses that are within 15 kilometres of the city,” Ms Young said. “The huge pricing drive means cashflow investors (those looking to make a profit from rents) are finding it difficult.”

Even so, the market was busier than ever, with buyer’s advocates having to turn away business as they did not have enough time, she said.

First-time buyers, often priced out of the Sydney and Melbourne markets, were looking to invest somewhere more affordable to be able to get into the market, Ms Young said.

“There are two main groups of investors – those in the lower-priced market of $500,000 to $600,000 and then those in the $800,000 to $1.2 million price band,” she said. 

Those looking to buy had not been put off by the recent announcement by the Australian Prudential Regulatory Authority on assessing borrowers’ ability to repay a mortgage at 3 percentage points above the interest rate, Ms Young said.

Meanwhile, Melbourne investors, like those in Sydney, were looking to “get on the gravy train” and buy in regional areas that had boomed during the recent coronavirus crisis, buyer’s advocate Ms Bakos said.

Those with enough money were still looking to buy period homes closer to the CBD, as they had always had great capital growth. 

While yields were down in Melbourne and other capitals, it would not last for long, with rents expected to snap back once Australian borders that were closed under COVID-19 restrictions, reopened and international tenants returned, she said.

“Typically we see an elasticity in capital city rents,” Ms Bakos said. “The parity won’t be where it is at now for long.”