Low home rent yields warn of overvaluation

Side view of a young couple looking at window display at real estate office

Garry Shilson-Josling
(Australian Associated Press)

If you’re looking for evidence that Australia’s housing market is overvalued, you can find it in the monthly report on home values from CoreLogic RP Data.

But it’s not the price measures that give the game away.

Sure, prices are up strongly.

The average price in the eight capital cities posted a 2.1 per cent rise in June, lifting annual growth to 9.8 per cent, with a rise over the past three years adding up to 25 per cent.

In the hot spot of Sydney, the three-year gain was 42 per cent.

With numbers like that, claims of overvaluation, or even a bubble, are understandable.

But there are other ways of looking at the market.

One is to judge housing in the same way as any other income-producing asset – by how much you pay to receive a stream of income, whether it’s dividends from a share, interest on a bond or rent from a dwelling.

And the CoreLogic RP Data figures suggest that, by such a yardstick, housing is indeed expensive.

Gross rental yields – rent received as a percentage of the market value of property – have fallen.

The average for houses in the eight capital cities in June was 3.5 per cent while for homes in multi-unit dwelling buildings it was 4.4 per cent.

For yields to return even to where they were even three years ago would require sizeable rises in rents or hefty falls in prices.

For example, the average rental yield on a house in Sydney fell to 3.3 per cent in June from 4.4 per cent in June 2012.

To return that yield to where it was three years ago would require a price fall of 25 per cent, from the current median price of $900,000 back to $675,000, or for rents to rise by a third.

But that’s not the way things are going at the moment.

“It looks likely that the pace of capital gains will remain higher than rental growth which will push rental yields even lower over the coming months,” CoreLogic RP Data head of research Tim Lawless said in his commentary on the figures on Wednesday.

“Melbourne continues to hold the unfortunate title of the lowest yielding capital city, but if current trends continue, it won’t be long before Sydney overtakes Melbourne due to the substantially higher rate of capital gain in the face of comparatively low rental appreciation.”

So it looks as though the talk of overvaluation and bubbles will continue for a while longer.



Houses up 17.8pct to $900,000, Units up 9.5pct to $650,000


Houses up 11.2pct to $615,000, Units up 2.4pct to $480,000


Houses up 4.7pct to $430,000, Units up 2.0pct to $337,200


Houses up 3.8pct to $500,000, Units up 1.3pct to $370,000


Houses up 3.0pct to $590,000, Units down 4.7pct to $420,000


Houses up 0.8pct to $347,500, Units up 1.2pct to $265,000


Houses down 0.6pct to $525,000, Units down 4.0pct to $425,000


Houses down 4.8pct to $585,000, Units up 4.9pct to $463,500


Houses up 10.4pct to $595,000, Units up 5.6pct to $500,000

(Source: CoreLogic RP Data)


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