Property Value and Yield - Inversely Co-related?


First post here - have enjoyed having a look through the forums here over the past month or so.

I'm thinking about dipping my toes in the water and buying my first investment property. We were fortunate enough to sell our PPOR in London in Sept 07 (literally about a week before things started heading downhill in UK property). We moved to Melbourne Australia in mid 2008 and have been renting here ever since.

We banked the capital from our UK property and I've been watching the market closely here (Melbourne Inner East) since being back with a view to either purchasing a PPOR and/or investment property.

I can't help but notice what seems to be a strong inverse co-relation between property value and rental yield - ie the higher the value the property, the worse the yield. I'm seeing potential yields of around 5-6% on property worth < 250k (small units) - and then yields decreasing to 2-3% on property 700k - 1.5M.

This matches our own rental experience where we have rented property for under $700pw that we know was purchased for $1.2M.

So on this basis, it seems like better value to potentially purchase a couple of cheaper properties at the low end rather than a mid range property. Given that we want to live in a property in a section of the market that is producing particularly poor yields, it also seems to make sense to rent our PPOR and instead use the savings to invest in what seems to be better yielding / lower value property.

Is this co-relation normal? Does it exist in most Australian cities or is it more restricted to the areas I'm looking at (Melbourne Inner East). Or maybe I've just called it wrong - my view is based on a string of anecdotal examples (albeit pretty good ones I think that I don't believe are anomolies).

Thanks in advance for your views.
No inverse, but a non-linear drop off in yield as you go up the pricetag scale.

Buying cheap and renting where we lived was certainly the way we started.

Has the added advantage of liquidity (able to sell of one or several IP's in times of need than one big IP) and spreading of geographical risk (IP in many places)


The Y-man

p.s. view above for Resi IP only