Yields set to rise in Sydney, Brisbane and Canberra

Posted on 25/04/2007  

While record low affordability will constrain price growth in the national housing market, investors should benefit from low vacancies and rising rentals, according to Westpac Bank’s Property Outlook 2007-2009.

Westpac says gross residential yields should rise above 5% in Sydney, Brisbane and Canberra as a result of the tight rental market.

Westpac sees the tight vacancy scenario as the one factor which could challenge its view that price growth averages will be closer to inflation (CPI) over the next three years. 

Affordability constraints have brought Australia’s residential property market to the same point in the price cycle as the equivalent time in the last eight year boom/bust period (1987-1995) – around 1992, when real prices remained relatively steady for almost four more years.

But these conditions provide opportunities for investors in the three markets where low vacancies are pushing rentals (and yields) higher. Sydney rentals rose by 7% in 2006, driven by a tight 1.7% vacancy rate. “The vacancy issue will not be helped by the low level of future supply in Sydney, with dwelling approvals down to 17,000 in 2006 - 50% lower than in 2003,” Westpac’s report says.

Investors with a long-term outlook may consider this an opportune time to buy, the report adds, with rental yields rising from a low of 3.8% in 2003 to 4.7% in 2006. It would take a rental increase of only 10% and a median price rise of 3% to make Sydney once again attractive to the investment market.

Likewise in Brisbane, the below-average vacancy rate of 1.7% drove rental growth to 13% for the year to September 2006. This pushed gross yields for ‘other dwellings’ slightly higher, to 4.8%. Brisbane’s vacancy rate has been below the long-term average of 3.4% since December 2003 and rentals have risen by an average of 10% since then.

Westpac says the value of investor finance in Brisbane grew 12% in 2006. It says: “We do not expect any slowdown given current vacancy rates, expected population growth and low future supply levels.”

Surprisingly, the nation’s capital offers the best opportunities for investors, with investment yields at 5.1%, the best in the country. Supply is low, reflected in a 1.1% vacancy level, which drove rents 7.1% higher in 2006. “With our forecast of rental growth outpacing price growth (in Canberra), these yields should rise, potentially attracting new investors,” the report says.

The outlook for investors is not as rosy in Melbourne, however, where the proportion of investors in the market remained steady at around 28%. This was slightly below the 10-year average of 30%. So despite the prospect of higher rental growth and a vacancy rate of 1.6%, a gross yield of around 3.8% for ‘other dwellings’ and low expected price growth over the next three years should ensure that investors remain around the 28% to 30% proportion of the total Melbourne market, Westpac says.

Westpac expects a stable interest rate environment should see demand for new properties in all markets rise by between 2% and 4% during the remainder of 2007. But the boom towns of Perth and Darwin will come back to the pack, while other markets start to pick up.


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