Investors can look forward to higher yields as prices stabilise and rents start to rise across Sydney. Sydney rentals have experienced very little increase over the past few years, while property prices have soared. For investors, this has resulted in average gross yields (annual rental income/property value) falling to a low of around 3.5%, which can translate to a net yield (income minus outgoings/property value) of less than 2%. Add to this APRA’s concerns about investor borrowing resulting in higher interest rates on investment loans, and it’s easy to see why there has been a slowdown in new investors coming into the market over the past few months. However, while yields are low, if you add the huge capital growth over the past few years, then investors’ annual return on investment look pretty healthy. Add to this the tax benefits of negative gearing on losses (income vs outgoings) and most property investors will have felt they’re ahead on the deal compared to other investment options.
The good news for investors is that rents seem to finally be on the move upwards. Data from Domain Group shows that Sydney is now the most expensive place in Australia to rent an apartment, with average rents of $510 a week, and the second most expensive place to rent a house with an average rent of $590 a week. The SQM Weekly Rents Index shows that the average rent for a 3-bedroom house in Sydney has continued to creep up, showing 1.5% increase over the past 12 months and 10.9% over the past three years. Apartments have fared similarly, with the 2-bedroom apartment average rent rising 2.3% during the past year and 10.7% over three years. Another positive is that SQM Research shows Sydney vacancy rates during September remained tight at 1.7%, compared to a nationwide average of 2.3% - indicating that rents may continue to move upwards.
Figures from Core-Logic RP Data reflect the steadying market, showing that average property prices in Sydney grew by only 0.1% in September. However, even with minimal growth during the month, Sydney still recorded quarterly growth of 4.6% for the September quarter. While this seems minor compared to a huge June quarter, where Sydney house prices grew by 9.8% (the fastest quarterly rise ever recorded), it is still a healthy growth rate.
While those investors looking to cash in their assets may feel they’ve missed the peak selling time, anyone who’s held their investment for more than a few years will still be looking at excellent capital gains. Plus, the combination of stabilising prices and rental rises will be seen as good news for new investors who were finding it hard to make the yield equation figures stack up. Hopefully, with the ongoing attraction of record low interest rates, it will also encourage more first home buyers into the market.