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Did rents fall in your city over FY16?

Did rents fall in your city over FY16?

Property investors continue to be challenged by falling rental yields, especially in markets showing strong value growth but weak increases in asking rents.

Asking rents in the capital cities went backwards over the 2016 financial year, with two capitals seeing particularly big downturns in their rental market returns.

Combined capital city rental rates fell by 0.6% over FY16, the greatest annual decline on record according to the latest Rent Review report from CoreLogic. This was fuelled by dramatic falls in Darwin and Perth, where rents were down 16.2% and 8.6% respectively. Brisbane and Adelaide also recorded marginal rental declines.

On the flipside, all other Australian capital cities recorded a rise in rental rates over the past 12 months, including the major markets of Sydney (up 0.4%) and Melbourne (1.7%). Canberra also saw an increase of 1.9%, with Hobart outperforming them all at 4.6% annual growth.

Stagnant asking rents combined with healthy property value growth in several markets also led to falls in gross rental yields across the combined capitals. A year ago, CoreLogic recorded combined capital city gross rental yields at 3.5% for houses and 4.4% for units. At the end of FY16, yields for house had fallen to 3.2% while unit rents were at 4.1%.

Not surprisingly, some of the biggest falls in yield were in Sydney and Melbourne, which recorded by far the strongest dwelling price growth of the capitals over FY16. But Darwin also saw a fall of almost one per cent in yields over the year.

What does this mean for property investors?

Cameron Kusher, research analyst at CoreLogic, predicted an ongoing weakness in the rental market, with rents likely to fall even further in many capitals over the coming months.

“The combination of the softest wages growth on record, relatively high levels of housing investment following record highs recently, historically high levels of new construction (most of which are units, which are more than twice as likely to be rented) and the slowing of population growth creates less overall demand for housing and means that landlords have little scope to increase rents,” he said.

Sydney has the lowest gross rental yields for apartments of all the capitals, while Melbourne is seeing the lowest rental yield for houses. Darwin’s big drop over FY16 means Hobart is now recording the highest rental yield for both houses and apartments.

Kusher argued that in the current market, “capital growth, which has slowed from its peak, will continue to be a much more important factor for property investors than rental returns”.

He also warned that “with so much new unit supply being built, much of which is inner city locations, there is the potential for a flight of tenant demand towards higher quality tenancy options.

“It may be harder for owners of older units with less amenities to compete with better located and facilitated new unit stock,” he said.

The lowest wage growth on record coupled with the slowing of population growth is likely to impact all property investors, not just those renting out older properties. 

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance. The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. The CBA Group does not accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.