Interest rates falling bringing rental yields back to norm?

[Ajax]

Have been looking at December 06 API magazine published lists of rental yields in NSW for the June quarter.

The five highest rental yields for houses in the state are 6.5% in Broken Hill...4.3% for Mayfield, 4.3% for Ashley, 4.2% for Alumy Creek and 4.2% for Waterloo.

Quite a few Sydney suburbs have rental yields at 2%.

Sydney suburbs like Cammeray and Willoughby score 1.7%, Paddington 1.6%, Rose Bay 1.3%, Vaucluse 0.9%, Darling Point 0.8%, Mosman 1.1%.

Has got me questioning what will be the mechanism by which rental yields come closer to average rental yields over time (which I suggest is 1 or 2 % below current interest rates)......obviously rents moving higher but this would require rents to almost triple in some suburbs, further falls in property prices (I don't see this happening in Eastern suburbs of Sydney) or falling interest rates.

I see interest rates falling quite significantly in the next few years coupled with rising rents.


Ajax

 

[Jamie]

Hiya Ajax,

I don't have the issue in front of me - can you just verify that API say there is only ONE town / suburb in all of NSW with a yield of 5%+ at the moment?

Thanks,

Jamie.

 

[alexlee]

From just a few searches on domain and re.com.au it would appear house yields are more around the 3.5 - 4.5% level for houses. All those 2 or below yields are in the most high end properties. Low yields is normal.

At 3.5%, if rents go up 30% and prices come down 10%, the yield would be 5%. Is a 30% increase in rent possible? Given that rent was practically flat during the boom, there's a lot of pent up rental increases to take it back to the long term average.

Say for a $300k house in Sydney (SW or West) 2% would be 115pw. Surely it's more like 200+ pw.
Alex

 

[Ajax]

Alex,

I can confirm that API figures using Home Price guide June quarter 06 figures have only one suburb/town in NSW with rental yield on houses over 4.3% (Broken Hill).The average house price in Sydney would be more around $540k...haven't checked West or South-West around 300k, but the yields improve as you move out West and South West with for instance 3.8% yield in Blacktown on a 325K median house price.

Units are a different story (top 5 by yield Chippendale units 6.5%, Ultimo units 6.3%, Singleton units 6.2%, Ballimore units 6.1% and Rosebery units 5.8%).

If I take my house in Redfern as an example rental yield for the June quarter according to API was 3%. I can't see many house prices falling in this suburb or most inner city or Eastern suburbs (some areas are starting to rise a little).

Apart from rents which I can't see doubling something has to give to bring rental yields more in step with interest rates.

This is why I believe that interest rate falls are on the cards-possibly 5 lots of 0.25% decreases over the next 3 years. Even then bank interest rates would be around 6.0%-6.25% with rental yields maybe 4.5% in Redfern for instance (this with a huge 50% rise in current rent over 3 years).

In the US interest rate futures markets are reading the latest FOMC announcement is indicating possible interest rate cuts next year.

"This was the fourth straight meeting that the
policy-making Federal Open Market Committee kept the fed funds
rate unchanged at 5.25 percent. In August, the Fed paused
after tightening monetary policy 17 times since June 2004.

What caught Wall Street's ear, though, was the FOMC's use
of the word "substantial" for the first time in its reference
to the extent of the slowdown in the once red-hot U.S. housing
market.

"This is a nod to the obvious, but still suggests a bit
more concern on the part of the Fed that had, until today,
downplayed the overall impact if not the risks posed by
housing," said Drew Matus, senior financial economist at
Lehman Brothers in New York.

The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
7/32 in price to 101-1/32, pushing its yield down to 4.50
percent, compared with 4.52 percent just before the Fed's
decision. Late on Monday, the 10-year note's yield was around
4.52 percent.

U.S. short-term interest rate futures gained on the Fed's
decision, sending a strong signal that Wall Street believes
the Fed's rate pause will continue for the next few meetings.
The market pegged the chance of a Fed rate cut in March at 28
percent, up from 24 percent before the Fed's announcement."


Ajax

 

[XBenX]

Alex,

I can confirm that API figures using Home Price guide June quarter 06 figures have only one suburb/town in NSW with rental yield on houses over 4.3% (Broken Hill).The average house price in Sydney would be more around $540k...haven't checked West or South-West around 300k, but the yields improve as you move out West and South West with for instance 3.8% yield in Blacktown on a 325K median house price.

Units are a different story (top 5 by yield Chippendale units 6.5%, Ultimo units 6.3%, Singleton units 6.2%, Ballimore units 6.1% and Rosebery units 5.8%).

If I take my house in Redfern as an example rental yield for the June quarter according to API was 3%. I can't see many house prices falling in this suburb or most inner city or Eastern suburbs (some areas are starting to rise a little).

Apart from rents which I can't see doubling something has to give to bring rental yields more in step with interest rates.

This is why I believe that interest rate falls are on the cards-possibly 5 lots of 0.25% decreases over the next 3 years. Even then bank interest rates would be around 6.0%-6.25% with rental yields maybe 4.5% in Redfern for instance (this with a huge 50% rise in current rent over 3 years).

MP is a macro tool, micro markets (such as property) dont impact enough to make the changes you are suggesting.

 

[Ajax]

XbenX,

forget your macroeconomics 1A or 2B or whatever.

All I'm saying is with rental yields this far below bank interest rates (say 3% avg. yield in Sydney for the June quarter) something has to give to bring rental yields more in line with the cost of borrowed funds.

This can only be by :-

(1) Falling house prices

(2) Falling interest rates

(3) Rising rental yields

or a combination of the above.

I know that over time a more normal relationship will exist between rental yields and the cost of funds (i.e. rental yields 1 or 2% below the cost of funds).

I'm questioning how that will occur given that house prices of suburbs in Eastern Sydney at least are stabilising and saying a combination of (2) and (3) will occur...with falling interest rates to be the main driver.

I could be wrong ...in which case house prices would have to adjust further downwards in low rental yield areas (I don't subscribe to this and hope it won't happen).

Ajax

 

[Bill.L]

Hi all,

What is "normal" ????

In the mid '80's you could get 7-8% yields, BUT, interest rates were 13-15%!!!

In the late '80's, at the end of the boom, yields were 4-6% and interest rates 17%!!!

If you think the comparison between interest rates and yields will come back to the level of just before the last boom, then you may be waiting a very long time. Perhaps that period was the anomoly?? History of the last 25-30 years would suggest so.

bye

 

[djones]

In my opinion, with Rentals being a function of Household income and salary levels and Interest Rates being Macro Economic tool rather then specific to property market it makes more sense that the Property prices need to adjust...

I am not suggesting a decrease in the prices but maybe a longer duration of of no increases in prices...

 

[XBenX]

XbenX,

forget your macroeconomics 1A or 2B or whatever.

All I'm saying is with rental yields this far below bank interest rates (say 3% avg. yield in Sydney for the June quarter) something has to give to bring rental yields more in line with the cost of borrowed funds.

This can only be by :-

(1) Falling house prices

(2) Falling interest rates

(3) Rising rental yields

or a combination of the above.

I know that over time a more normal relationship will exist between rental yields and the cost of funds (i.e. rental yields 1 or 2% below the cost of funds).

I'm questioning how that will occur given that house prices of suburbs in Eastern Sydney at least are stabilising and saying a combination of (2) and (3) will occur...with falling interest rates to be the main driver.

I could be wrong ...in which case house prices would have to adjust further downwards in low rental yield areas (I don't subscribe to this and hope it won't happen).

Ajax

What you said was that you couldnt see rents doubling and that because of this interest rates would decrease.

Apart from rents which I can't see doubling something has to give to bring rental yields more in step with interest rates.

This is why I believe that interest rate falls are on the cards

Whilst interest rates could very well decrease it has virtually NOTHING to do with what is happening in the property market.

You are putting the cart before the horse.

 

[Tim]

Ajax,

i think I know where you are coming from overall. So OK if you look at the combination (or part thereof) required to both increase affordability and attract investors back to the property market (not just the high end market) we have:

1) Reduction in interest rates
2) Increase in rents
3) Reduction in house prices or stagnation in prices for a while
4) Increase in income (impacts directly the forumula used to determine affordability).

So IMHO I suspect:

1) Interest rates - obviously incredibily hard to predict however I do see a few things adding to inflation that seem like they might persist unless we were to have an actual recession. These factors include current wage growth, higher rentals feeding into CPI, stock market gains stimulating activity, current resources boom etc. I can't see a reduction in rates until late 2007 or 2008 at the earliest (said as he polishes crystal ball)

2) Increase rents - clearly going to happen but if constrained by wage growth may result in increased polarisation of rental accomodation, more trailer park style rents etc. This alone though does have the capacity I think as long as it is sustained to both attract investors back to the market but to also ironically keep interest rates up

3) Reduction in house prices - maybe for Perth, I reckon the rest of the country is not going to slide backwards and at worst will creep ahead. We could even be seeing the beginning of the next boom now with Sydney waterfront and other prime property booming now

4) Increases in income - over the longer term I think this will be constrained by new IR but not too any massive extent.

So what do I think will cause the yields to improve? IF they improve much I suspect it may be due to rents increasing following by an easing of MP. I also suspect we may have hit a new affordability low that puts the benchmark that much higher resulting in either the 70/30 buy/rent stats further out to something like 65/35 or results in low cost, higher density and less desirable (to live in) housing.

My 2c worth.

Timbo

 

[stretchy]

BillL,

Do you have figures for yields going back 20-30 years? It would be very interesting to see what actually happened in the other booms, rather than the last one. Even some anecdotal tales would help

Hi all,

What is "normal" ????

In the mid '80's you could get 7-8% yields, BUT, interest rates were 13-15%!!!

In the late '80's, at the end of the boom, yields were 4-6% and interest rates 17%!!!

If you think the comparison between interest rates and yields will come back to the level of just before the last boom, then you may be waiting a very long time. Perhaps that period was the anomoly?? History of the last 25-30 years would suggest so.

bye

 

[Bill.L]

Hi all,

Stretchy,

I have shown the figures of a house we owned back in the '80's in numerous other threads over the last few years, so I apologise to those who have seen them before.

In 1981 we purchased a 'median priced' 3 x1 house in the Melbourne suburb of Mulgrave for $44,000. The rental yield on such a property was ~$70 per week.

This was a gross yield of 8.2%.

However the interest rate we were paying was 13.5%, that we fixed a little later at 14.5%.

Several years later (mid '80's), when the house was around $60k in value, the rental was ~$85 pw, giving a yield of ~7.3%, while we were happy to be paying only the 14.5% of our fixed loan.

In 1990, when we sold for $110,000, the rents were ~$120 pw, giving a yield of 5.6%, at a time when interest rates were 17%.

Last year you could bought the house across the road for $250,000. (unrenovated) The rentals in the area for this type of house were ~$200-220 pw. In last years terms the gross yield was ~4.3% while interest rates were ~7%.

To try and compare apples with apples, if I look at yield as a percentage of interest rates, I get....

1981 56%
1985 50% this was before the late '80's boom.
1990 33%
2005 61%
In other words, this property is MORE affordable in 2005, when looking at yield and interest rates.
The reason I have used 2005, is because the house across the road from the one we owned sold last year and was pretty much the same design, size etc.
I believe that both rents and prices have risen in the last year for this area.

bye

 

[stretchy]

Great stuff Bill. I find it strange that affordability is so low (reported to be at the same level as the late-80's period of 17%+ rates) yet by your yield/interest rate ratio, its substantially cheaper now.

If anything, it tells us that the yields of the late 90's (which I am still waiting for before buying) were an anomaly, rather than the general case.

 

[redwing]

Would you expect that many investors have deserted property in favour of shares of late with the great growth in the stock market; With this decrease in Property Investors that there will be a shortfall in the number of available rental properties....yields will continue to rise, Investors will look at property again and the cycle will continue

 

[Jamie]

Would you expect that many investors have deserted property in favour of shares of late with the great growth in the stock market; With this decrease in Property Investors that there will be a shortfall in the number of available rental properties....yields will continue to rise

Im certainly finding this at the moment. One major agent in town has 300 properties on their books, and as of yesterday 2 were vacant. Rents are up about 10%-15% in the last year, and I can only see upwards movement in the near future. A friend looking to rent a place attended an open last Saturday, and the agent received 15 rental applications that day. People were offering $50/week ABOVE the advertised rental just to secure somewhere to live.

A few areas Im watching in QLD are looking the same... I just put the rent on one place up 20% with no complaints from the tenant, and plan on doing the same on another place in the next month.

I cant seriously see any upwards pressure on house prices in the next 3 years or so on the East Coast, but rents are definitely on the way up for those currently holding properties.

Jamie.

 

[jrc]

When I can get 6.1% on an internet savings account with the NAB, rent yields are too low. I would consider it is as likely prices might fall to compensate. I was looking at a house the other day, asking 215K, renting $205 p.w. Gross Yield 4.96%. Interest rates have increased 0.5% since the house was first advertised. Theoretically therefore the yield needs to increase to at least 5.46% to compensate, which would mean a price of $197K approx. It's interesting to note the house sold for $160 K 2 years ago. I'd consider it worth $180K max based on similar properties

 

[FrankGrimes]

A few areas Im watching in QLD are looking the same... I just put the rent on one place up 20% with no complaints from the tenant, and plan on doing the same on another place in the next month.

Jamie

I'm finding the same thing, both my properties became vacant in November and were filled again so fast and with a rent increase to boot. My advice is to only put tenants on short leases <= 6 months to take advantage of the current market.

Renters have had it too good for too long and now things are just playing catchup. What are peoples thoughts on buying at the moment with yields around 4%-5% with the anticipation of strong rent increases over the next few years? Something I'm thinking about at the moment.

Bill L, very interesting stuff and thanks for posting. You must regret selling the place

Grimey

 

[Bill.L]

Hi all,

JRC, When you could get 13-14% on your money in the mid '80's, what would you have expected the yields to have been??? For our average house they were 7.5%, and this was BEFORE the late '80's boom!!

Frank,

We do not regret selling that house, as we used the money for other purposes. Who knows how different our lives would be if a simple thing like that were to change.

bye