Rental returns nothing to write home about

Leith Van Onselen February 15, 2012

An oft-neglected component of the Australian housing debate is the assessment of rental growth.

When rents are discussed, they tend to be put forward by bullish prognosticators as one reason why Australian housing is either worth its high prices or will be in the future.

The truth is rental returns are low, especially so when compared with other asset classes, and have been largely flat in real terms since 2008.

But recent data shows that markets across the nation are also diverging strongly.

Australian Property Monitors (APM) this week released its Rental Market Report for the December quarter and it is a very mixed bag. Canberra (+6.4%), Brisbane (+2.7%) and Perth (+2.6%) registered strong growth in house rents over the quarter, Sydney recorded modest growth, whereas Melbourne, Hobart and Darwin registered no growth at all:

More below

Over the year, Canberra (+6.4%), Perth (+5.3%) and Sydney (+4.2%) registered solid rental growth, whereas Hobart (-3.0%), Melbourne (-1.4%), Adelaide (+0.0%) and Darwin (+0.0%) registered negative or zero growth.

Adjusting for inflation, annual rental growth was achieved in Canberra (+3.2%), Perth (+2.1%) and Sydney (+1.0%), whereas annual falls were experienced in Hobart (-5.9%), Melbourne (-4.3%), Adelaide (-3.0%), Darwin (-3.0%) and Brisbane (-0.4%):

The results were stronger for units, with solid rises across the board in all cities except for Hobart and Melbourne, whose annual rental growth failed to match inflation.

Melbourne lags

Although most of the nation looks flat in real terms, for me, the most interesting aspect about the APM rental series is the very poor rental growth that has been achieved in Melbourne over a long period of time.

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As shown in the below chart, median Melbourne house rents have increased by only $10 in three-and-a-half years. Melbourne monthly rents are currently $140 (28%) below Sydney's, $20 (5%) below Brisbane's, and $40 (-10%) below Perth's.

Moreover, they have fallen significantly in real (inflation-adjusted) terms:

The situation is better for units, with Melbourne posting returns marginally in excess of inflation over the past three years.

 

The divergence between Melbourne rental returns is even more stark in rental yields.

Melbourne gross house rental yields (currently 4.0%) are well below the other capitals, whose gross yields range between 4.5% to 5.1%. Moreover, with rents flat-lining, the recent improvement in Melbourne gross yields, from 3.6% in September 2010 to 4.0% currently, has been caused entirely by falling house prices.

The situation is similar for unit rental yields. Although gross unit yields are higher than for houses, Melbourne's yields once again lags the other capitals by a significant margin.

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