Watch out for rental yield falls | John McGrath

In his recent column in Switzer, John McGrath discusses the decline in rental yields across Australian capital cities.

Here’s what he said:

One of the trends likely to play a role in ultimately slowing Sydney’s market down is declining rental yields.
John Mcgrath
This will start to impact investor sentiment; which will have a flow-on effect for the market as a whole because investment activity is one of the things keeping the boom going.
Investment activity is still very high, with 52.9% of all new loans in NSW going to investors, according to Australia’s largest broker, AFG.
Although weekly rents across the city are rising, they are not growing at anywhere near the pace of property prices, so the overall yield for today’s investment purchasers is actually in decline at 3.4% for houses and 4.3% for apartments.
Looking at the big picture though, it’s not that big a deal when you can lock in a three-year fixed loan below 4% with the cash rate now at 2.0%.
If you’re planning to hold for the long term (as you always should), then you should only be buying if you can afford to pay the mortgage when rates are back to 6.5% or 7%-plus – which will not be in the short term but will happen eventually.
In the meantime, there’s the benefit of deductible expenses and negative gearing to help you deal with any shortfall.
Problem is, many investors think short term and focus too much on what a property will put in their pockets each week, instead of the capital growth it will deliver over the long term – and that’s where the big money is in property investment.
RP Data has just released its quarterly rental report for March 2015, which gives us a snapshot of the rental market across the country.
Here’s where we are at: 
Median rent (houses) – $530 per week
Year-on-year (YOY) change – 3.9%
Median rent (apartments) – $500 per week
YOY change – 2%
Median rent (houses) – $390 per week
YOY change – 2.6%
Median rent (apartments) – $370 per week
YOY change – 1.4%
Median rent (houses) – $410 per week
YOY change – 2.5%
Median rent (apartments) – $390 per week
YOY change – 0%
Median rent (houses) – $350 per week
YOY change – 2.9%
Median rent (apartments) – $300 per week
YOY change – 0%
Median rent (houses) – $450 per week
YOY change – -5.3%
Median rent (apartments) – $425 per week
YOY change – -5.6%
Median rent (houses) – $350 per week
YOY change – 6.1%
Median rent (apartments) – $280 per week
YOY change – 0%
Median rent (houses) – $630 per week
YOY change – -3.1%
Median rent (apartments) – $520 per week
YOY change – -5.5%
Median rent (houses) – $480 per week
YOY change – 0%
Median rent (apartments) – $390 per week
YOY change – -2.5%
While investor activity in Sydney is still strong right now, our company has seen an increase in investors from Sydney looking at Brisbane, the Gold Coast and some regional Queensland markets, including the Sunshine Coast for better investment opportunities.
Yields are definitely better at 4.5% (houses) and 5.4% (apartments) across Brisbane/Gold Coast combined and there is great opportunity for capital gains in South-East Queensland over the next few years, so it’s not a bad move.
But Sydneysiders shouldn’t give up on Sydney just because yields are a bit lower these days.
I have always advocated investing in an area you can easily drive past.
If you live in Sydney, it’s a good idea to invest in Sydney because your market knowledge is better and you’ll have the sleep-at-night factor of being physically close to your investment asset in case of an emergency or major repair issues.
The bottom line is focus on capital growth.
Think of yields as a means of helping you pay the mortgage and accept the likelihood of a shortfall in weekly costs if you’re purchasing in a major capital city like Sydney.
The gains to be had over the long term are far more important!

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