With steep rises in house and apartment prices and rents not growing at the same pace, rental yields are shrinking. Together with rising inflation and interest costs investors in the Australian property market are going to find it increasingly more difficult to get returns.
Is Yield Everything?
There is no doubt that yield plays an important role in property investment, however, is yield everything? We don’t think so. The reality is in periods of rapid growth in capital values, yields will suffer simply because rents rarely accelerate at the same pace as capital growth.
Obviously, rental income is important because most investors use this to service their mortgage debt. If the rental income falls below the mortgage payments then investors will need to pay into their mortgage to keep up with payments or risk potential mortgage default.
However, most investors need to understand their investment objectives, before they get too concerned about the rental yield and if their rental payments cover their costs. For most investors, unless they have an immediate use for the income, capital appreciation is far more valuable. Particularly in Australia where it is very easy to release excess equity to increase the size of their portfolio which will create much greater long-term value.
How do Capital Cities Compare for Yields?
Yields have been hit hardest in the market for houses as demand for houses has increased at a much quicker rate than that of apartments. Much of this increase has occurred due to the pandemic where many people looked to move further out of city centres to purchase houses, increased demand created greater upward pressure on house prices.
Gross Rental Yields for Houses
In the housing market, secondary cities still stand out for the strength of their rental incomes relative to capital values. Which cities have the highest rental yields in Australia? For houses, Adelaide, Canberra, Darwin and Hobart still offer strong yields and are likely to be more interesting for investors looking for yield over and above capital values.
| Capital city | Dec-20 | Sep-21 | Dec-21 | Quarterly Change (%) | Annual Change (%) |
| Sydney | 3.01% | 2.68% | 2.60% | -2.9% | -13.6% |
| Melbourne | 3.10% | 2.97% | 2.92% | -1.7% | -5.8% |
| Brisbane | 4.51% | 4.27% | 4.17% | -2.3% | -7.5% |
| Adelaide | 4.44% | 4.21% | 4.27% | 1.5% | -3.8% |
| Perth | 4.95% | 5.01% | 5.20% | 3.8% | 5.2% |
| Canberra | 4.17% | 3.75% | 3.70% | -1.2% | -11.1% |
| Darwin | 5.40% | 5.30% | 5.17% | -2.4% | -4.1% |
| Hobart | 4.71% | 4.22% | 4.15% | -1.6% | -11.8% |
Gross Rental Yields for Apartments
Unsurprisingly, apartments still lead the way for yields in Australia’s capital cities. Again it is Australia’s secondary cities that have outperformed Sydney, Melbourne, and Brisbane – with the one notable exception Darwin where yields are lower.
| Capital city | Dec-20 | Sep-21 | Dec-21 | Quarterly Change (%) | Annual Change (%) |
| Sydney | 3.48% | 3.36% | 3.39% | 0.7% | -2.8% |
| Melbourne | 3.94% | 3.84% | 3.94% | 2.6% | 0.0% |
| Brisbane | 5.11% | 5.15% | 5.16% | 0.3% | 1.1% |
| Adelaide | 5.39% | 5.32% | 5.40% | 1.4% | 0.2% |
| Perth | 5.54% | 5.60% | 5.76% | 2.8% | 3.8% |
| Canberra | 5.84% | 5.62% | 5.73% | 2.0% | -1.8% |
| Darwin | 7.05% | 7.02% | 6.83% | -2.8% | -3.2% |
| Hobart | 4.54% | 3.95% | 3.98% | 0.7% | -12.3% |
Yield or Capital Appreciation? What’s right for me?
Working out the right balance between long-term capital growth and yield is a difficult decision for investors. Investors need to do their homework before they buy and make sure they know what they are looking to achieve.
As well as having a long-term well thought out investment plan investors need to be able to answer the following questions before they sign on the dotted line.
What is the Market Value of the Property?
Have you given enough thought to the value of the property? What is driving your decision making – is this based on real data? Or simply based on information provided to you by the agent selling the property?
What is the net return after tax?
What is your forecast return after-tax both from cash and total annual return basis? If you haven’t prepared a financial model you are buying blind!
Am I getting the best deal possible?
When buying property the purchase price is everything, it is possible to turn a poor property into a good investment by simply buying at the right price. However, if you pay too much it will take you years to turn the situation around.
Important notice: Proptech Pioneer and its associated companies seek to provide real estate investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.
