Why The Rental Market Is Exciting Property Investors
Over the course of the pandemic, the rental property market has seen its ups and downs. However, property investors are buzzing with confidence and excitement that activity will rise again despite the drops in rental yield.
What is Rental Yield, and Why is everyone telling me it’s important?
Gross rental yield is your rental income as a percentage of your properties’ value.
You calculate it like this:
Gross rental yield = (Annual rental income/Property value) x 100
Along with vacancy rates, rental yield is one of the two most important factors that investors consider before purchasing a property as it creates the ideal investment environment.
- An area with a high and/or increasing rental yield
- A steady or declining vacancy rate
High rental returns and quick occupancy can result in positive cash flow.
Gross Rental Yields in 2021
According to CoreLogic, 2021 saw annual rental value growth rise 11.8% to its highest point since 2008. However, the gross rental yield fell across Australia due to the COVID-19 pandemic and the rental supply constraints.
So Why Are They Falling?
Supply and demand is a very popular phrase in the property market and relies heavily on each other to influence any changes it undergoes. The pandemic hit the rental market hard due to the undersupply of property for high demand, resulting in purchase prices skyrocketing.
Since there is a direct relationship between rental income and property value, when calculating rental yield, an increase in the median property sale price will result in an equal decrease in rental yield.
Is there any opportunity for me as an investor?
PRD chief economist Dr Diaswati Mardiasmo says falling rental yields aren’t necessarily bad news for investors.
Multiple other factors can contribute to market trends and create great property investment opportunities. These including:
- Balance of local supply and demand: Rising rents, low or falling vacancy rates and a low average number of days on the market indicates a strong demand for rentals. This in turn, leads to higher rental returns and faster occupancy for better cash flow.
- Planned developments for the area: Such growth drivers improve the livability providing the potential opportunity to attract more people to the area, leading to strong rental demand and future capital growth.
- Slowing property price growth: This is good news for all property investors. As property price growth is now slowing down and rental rates are rising due to the return of overseas arrivals, rental yields are likely to rise again this year
Yes! These factors indicate a strong outlook for property investors, resulting in a recent boost in market activity.
Rental Yields are back on the rise!!
The start of the new year alone is already showing a promising shift in these trends across all of the capital cities, according to PopTrack economist Angus Moore.
“In Melbourne and Sydney, we saw advertised rents fall for much of the first part of the pandemic,” Mr Moore said.
“That’s starting to reverse now, and rents are growing in these cities as well.”
According to realestate.com.au PropTrack data, the median advertised rent in Australia is $450 per week, a 4.5% increase over the previous 6 months as the rental market tightens and renters face limited options.
These rising rents will help support yields for property investors, particularly since property prices aren’t expected to rise as quickly this year, Mr Moore noted.
Adding to the rental figures, Corelogic reports show the growth in rent values (0.8%) has outpaced property values (0.6%), leading to gross rental yields stabilising at 3.21% over February 2022 – the first time in 17 months that gross rent yields did not decline.
Here, you might wonder what could be the reason for this. Well, this was because of the pandemic restrictions easing and the national & state borders opening up again.
If these conditions remain constant throughout the year, gross rental property yield is expected to increase due to the inflow of international students, permanent residents and Australian citizens allowed back into the country.
Usually, most overseas immigrants experience a ‘tenure cycle’ that begins with renting and shared accommodation when they first enter a new country to reside.
This means that the increased number of people arriving in Australia will most likely rent first, and due to this greater demand, the property rental yield is expected to rise in the coming year, a big HOORAY here!
Increasingly Active Investors
Over the year of 2021, many investors exited the market, selling their property to take advantage of the strong house price growth.
But, and this is a huge but, this trend has reversed in 2022, with investors becoming increasingly active in the market.
We observed a comeback of investors since COVID-19, “committing to $10.3 billion in investor loans as of December 2021, a rise of nearly 75% in the past 12 months”, according to Dr Mardiasmo.
During this time, the proportion of investor finance also increased, with total housing loan commitments rising from 23% in December 2020 to 32% in December 2021.
In addition, some investors have shown regret when opting out of the market too soon.
Ryan Khorianto, a property investor, has two investment properties in Sydney, one in Lidcombe that he purchased five years ago and one in Leppington that he purchased several months ago and his own home.
Mr Khorianto sold another investment property in western Sydney in the mid-2010s, and while he made a $200,000 profit, he said it was a good lesson to hold onto the property for the long term.
He believes it would have increased in value during the most recent boom. Would you do the same thing if you were Ryan? Would you hold on?
Now Is A Great Time To Invest!
Properties for sale across Australia are flying off the shelves *literally*, as current home buyers are snapping up homes fast to lock in low mortgage rates before interest rates rise in the coming months.
So now might be the perfect time to secure your investment property.
Give us a call at (02) 9056 4311 or enquire here to speak with one of our investment strategists to find out how you can start building wealth through property today.