The Weekend Post - Real Estate
Look to rental yields for value
WHEN investing in property, there are generally two considerations for income.
The rent, which is your money now, and capital growth, which is your money later.
Looking back over late 2020 through to early 2022, with finance cheap (via low interest rates) and money coming sooner rather than later via rapid capital growth, rental returns took a back seat for many investors, with buyers willing to accept a lesser yield upfront just to get into the market.
The Sydney and Melbourne markets in particular were shining examples of this kind of approach, with Sydney showing a median rental price of $600 per week by the start of 2022 against a median sale price of circa $1.6m.
While the two don’t necessarily have to line up, that’s a rather meagre 1.95 per cent gross yield on the rent.
To be fair though, it was pretty easy to disregard $30k in gross rent against a $400,000 rise in median house price over the course of 2021.
Fast forward to today, and with interest rates back to normal and capital growth settling back down to more sustainable levels (or even taking a break in many areas) rental yield has come back to front of mind for many.
Again, using those capital city markets as a benchmark, anyone that bought in February this year anticipating the market to repeat 2021 has probably had a bit of a shock – with their cost of debt now double and those same costs dropping the budgets of their prospective buyers, eating up any capital gain potential, at least in the short run.
Coming back locally, our median house price sits a little over $500,000 against a median rental price of circa $530 per week.
That translates to a 5 per cent gross yield, with even stronger returns achievable in many instances. While it might not have the sex appeal of the headline-grabbing capital growth we’ve seen of late, it does mean that investors have a far better chance of reducing their holding costs.
Higher rental yields also mean better support for investors and being better able to weather the storm of higher repayments and other costs. With affordable pricing, high rental demand and that all important yield remaining positive, Cairns should enjoy a softer landing than most.