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Evidence of flattening rental yields is continuing to be seen across each of the capital city markets.
According to CoreLogic RP Data, the gross rental yields for a capital city dwelling averaged 3.7 per cent in February, compared to 4.3 per cent the year before.
CoreLogic RP Data said this was due largely to the consistently high rate of dwelling value growth relative to rental growth.
Head of research Tim Lawless said capital city dwelling values have been rising at more than three times the pace of weekly rents.
“The by-product of such strong capital gains and relatively weak rental growth is that rental yields are being forced lower and lower,” he said.
In Melbourne, the yield profile is the lowest of any capital city, with the typical Melbourne dwelling showing a gross yield of just 3.3 per cent.
Sydney isn’t far behind with a gross dwelling yield of 3.6 per cent.
However, Mr Lawless said if Sydney dwelling values continuing to outpace rents, the city may overtake Melbourne as the lowest-rent yielding capital.
Mr Lawless said the strong levels of investor activity in the Sydney housing market can be seen in the total return available – that is, capital gains plus gross rental yield.
He said total returns in Sydney are approaching the 20 per cent mark over the past 12 months, substantially outperforming other asset classes.
“Importantly, even though dwelling values aren’t rising as quickly in Brisbane, the total return is almost equal to Melbourne’s, at 10.9 per cent in Brisbane compared to 11.1 per cent in Melbourne, thanks to the healthier yield profile of the Brisbane market,” he said.
Mr Lawless said it is clear that investors, particularly in Sydney and Melbourne where investor activity is most prominent, are speculating that capital gains have further to go and are ignoring the low-yield profile of these cities.
“While this may be a successful strategy in the short term, we would suggest a focus on both capital growth and rental return is a safer and more sound strategy overall,” he said.
