Rents heading in the right direction in Australia for 2020
For anyone considering buying an investment property in Australia who is looking for good news in terms of rents, the latest CoreLogic Home Value Index for January 2020 shows that these increased nationally 0.5% on average during the first month of the year.
This marks an annual 1.3% rise in rents across Australia, up from only 0.4% at the same time last year.
Analysts attribute the rise to a decrease in the supply of rental stock, with near-lows in investor participation being recorded. This has had a slowing effect on the stock of new housing that is being made available to the rental market.
However, the rate of rise is not evenly spread across the country. Rents have risen by 5.8% in Hobart over the last year, and 2.0% and 1.9% in Adelaide and Perth respectively.
This has been accompanied by a -1.9% fall in rents in Darwin and -0.6% drop in Sydney. Nevertheless, Darwin currently offers the highest rental yield at 5.8%, with the lowest average yields being obtained in Sydney at 3.0%.
House prices on the rise across Australia
At the same time, there has been an overall increase in house values in Australia’s capital cities. According to the CoreLogic National Home Value Index, house prices rose by 0.9% in January 2020, with the annual growth rate now at 4.1%.
Rises were seen nationwide (except in regional South Australia, where they remained at previous levels), and analysts believe this is part of an upward trend that began to be seen across the country from the middle of 2019.
The most significant gains continue to be made in Sydney and Melbourne, with rises of 1.1% and 1.2% respectively. Other capital cities also saw less significant rises, and nationally house values have recovered 6.7% since the most recent low point in June 2019. Median house prices in Brisbane, Adelaide, Hobart and Canberra are now at record highs.
Nevertheless, there has been some slowing in the rate of overall national growth, with the current rate of 0.9% down from the recent high of 1.7% in November 2019, although this is roughly in line with market slowdowns that typically occur during the festive period and summer months.
How do rising house prices impact on rental yields and property investment in Australia?
It is generally the case that rising house prices have a negative impact on gross rental yields, and this would appear to be what is currently happening in Australia, with average gross yield across all capital cities at 3.5%, the lowest since March 2018.
However, as is the case with rents, rental yield rates are not the same in capitals across the country and reflects the fact that yields tend to be higher when rental conditions are strong when compared to house prices.
For instance, Darwin has the highest average gross rental yield at 5.8%, prompted by house prices falling at a faster rate than rents. In Sydney, however, rental yields are at a record low of 3.0%, due to the fact that rents have fallen at the same time as there has been a significant rise in house prices.
When looking at the total returns that are possible on an investment property (calculated by adding the gross rental yields to the annual capital gain), Hobart is leading the way with rental yields at 5.0% and a total return on investment of 10.5%.
Lower interest rates for real estate investing means positive cash flow
The average mortgage rate on offer for anyone looking at property investment in Australia is currently 3.48% (three year, fixed rate). As this is slightly below the average national capital city gross rental yield, the result could be positive cash flow for investors, i.e., an investment property pays you a monthly income over and above holding costs, meaning that now could be the right time to grow your property portfolio.
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