‘Worrying’ rental yields declining in hot markets

Declining yields

As investor activity remains unabated in the Sydney and Melbourne property markets, rental yields will continue to soften, according to an Australian economist.

With investors still flocking to the market, the rental yields their Sydney and Melbourne properties are likely to achieve in the short term are minimal, AMP chief economist Shane Oliver says.

“I think rents will keep slowing down. Rent yields were only 0.6 per cent year to December quarter so that's already quite soft,” Mr Oliver told Nest Egg.

“Looking at the REA data, it seems as if rental yields are still falling so if you’re in Sydney and Melbourne you’d struggle to get a net rental yield of much above 2 per cent.”

Despite this, investors remain undeterred, appearing to prioritise potential capital growth over yields.

“It seems investors are ignoring the relatively low net rental yields but are after the capital gains prospects and I suspect that’s becoming a bit bubbly that prices are continuing to go up at a rapid rate because they’re expected to and they keep buying into the market,” Mr Oliver said.

While he remains sceptical that a housing bubble exists, Mr Oliver said there is a danger in this type of speculative investment.

“You’re not taking note of the fundamentals, being that yields are low and income growth is slow, [and are] focusing on capital growth instead,” he said.

“When investors start to make up 50 per cent of the market in this environment, it can be a bit worrying.”

 

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