Part 2 - Can rental yields reveal growth prospects of a market

November 23, 2017

 

 

 

Furthermore, securing a strong level of rental returns can also be linked to the bottom of the property cycle and can represent the ‘opportunity’ phase of a market. 

 

As it is indicative of strong demand to live in the suburb, with a relatively low median house price (as rental yield is expressed as a percentage of that median house price).

 

The opportunity phase of the market is the period where market prices have sat flat for a period of time and the ‘growth’ phase of the cycle is in the horizon, creating opportunity for investors and strong rental yields can be achieved.

 

The rental yields within a market today can really can tell us a story if we read between the lines and identify certain market trends.

 

Sydney and Melbourne prices increased for the better part of a decade bringing rental yields to where they sit today.

 

Sydney house prices surged over 90% since 2009 and Melbourne accumulated over 100% in value since 2007.

 

Whilst prices continued to increase, what you will find is the opposite for rental yields, which naturally declined as these years surpassed.

 

The typical market trend identified here is whilst prices are going through the growth phase and ‘booming’, weekly rental returns increase at a much slower rate and rental yields deteriorate.

 

It’s no surprise that Sydney and Melbourne rental yields are suffering and actually reached their lowest point in history in recent times. Looking at the capital growth achieved in both Sydney and Melbourne, where rental yields sit today and we also analyzed the lack of affordability within these markets, an investor would come to the conclusion that the peak of the property cycle has been meet for these two cities.

 

In contrast, Brisbane market house prices increased over 170% from 2001 and peaked back in 2008. The market entered its natural correction phase and from 2008 to the end of 2016 a mere 17% in the median house price was achieved.

If we once again analyze the capital growth achieved so far, the strong rental yields in place and identify the healthy level of affordability that’s currently in place, an investor would come to the conclusion that the market represents the opportunity phase of the property cycle for this city.

 

If we read between the lines as an investor and look at where rental yields sit today within any given market, analyze the health of affordability, we can come to a logical conclusion which market is at the peak and which market is at the bottom. As an investor we are always looking to maximize our potential returns, mitigate our risk and enter the market at the right time. The aim is to hold a property for the whole growth phase, not just a portion of it.

 

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