Rent boom breathes life into investment property

Residential property investors have enjoyed unprecedented levels of positive returns as rental yields outpace mortgage rates.

Residential property investors have enjoyed unprecedented levels of positive returns as rental yields outpace mortgage rates in half of all capital cities.

Data from SQM Research shows the gap between the ­national weighted rental yield and the basic variable home loan rate is widening following the ­Reserve Bank’s decision to cut rates in the midst of tightening rental markets in several cities.

Nationally, the weighted rental yield in September sat at 4.18 per cent compared to the basic loan rate of 3.46 per cent, meaning investors enjoyed an ­average positive cashflow return of 0.75 per cent.

SQM Research managing ­director of Louis Christopher said the scale of positive returns was unprecedented.

“This is a really rare event. I’ve never seen it before in my career. Nor have I seen so many capital cities return a positive yield,” Mr Christopher said.

“Interestingly, it hasn’t made a lot of sense for someone with a self-managed super fund to buy residential property as there was no way to negatively gear it. However, given traditionally attractive commercial property yields have been going down, residential might now be more attractive.”

Hobart offered the highest level of positive yield at 1.74 per cent, with rental growth in the ­incredibly tight market outpacing the city’s housing boom.

However, Mr Christopher noted the opportunity to get a good deal might have passed as there was little room for further growth. He pointed to the growth potential of Perth and Brisbane as smart investment opportunities.

In terms of risk versus reward, Perth appears to be the frontrunner. Several economists predict the downturn will slowly fizzle out in the western capital through 2020, with SQM forecasting prices to grow between 3 per cent and 6 per cent.

While median prices have fallen 8.7 per cent over the year to the lowest point in a decade, CoreLogic data for October showed gross rents have risen 4.3 per cent annually.

Mr Christopher noted Brisbane would be the safer option, with the state’s diversified economy offering greater stability.

“It is still a buyer’s market in Perth, with good opportunity for investors. Risk versus reward is better but what I can’t say is when the market will bottom out,” Mr Christopher said.

“But Brisbane is a safer play. Investors there aren’t trying to catch a falling knife. It offers a good amount of positive risk.”

While Sydney and Melbourne approached a break-even point through 2019, neither market was likely to achieve a positive cashflow next year.

Rental growth was not expected to keep up with the rate of house price increases, with SQM forecasting growth of 10-15 per cent, causing the gap to widen again.