Some might say that the Australian residential housing market has become the foundation of our nation’s wealth. It has a total combined worth of around $6.7 trillion.
Translated into physical terms, that means bricks and mortar contain a serious amount of household wealth. In fact, in its September 2016 Housing Market and Economy Update, CoreLogic reported that over half of that household wealth is held in these assets.
Simply put, this means that many of us have a considerable amount of cash tied up in real estate assets. Due to low interest rates those numbers are set to rise, making property more attainable and infinitely more attractive to investors.
Be warned, however, that it takes more than low interest rates to successfully manage cash flow as an investor. In terms of property rental, you should look to set up a watertight strategy for maximising returns on property.
It’s unfortunate that currently the ongoing low interest state of the country is impacting on the broader rental markets. This is partly due to inflation being contained at a slow pace.
It isn’t much of a surprise therefore, that the rate of growth for Australia’s capital cities has increased steadily since 2012. By around 6.1% (all dwellings), gross rental yields have declined somewhat, from 4.5% in 2012 to around 3.3% as of September 2016.
According to CoreLogic, the data shows a drop of -0.8% in annual housing rental for all cities, with Darwin recording an average fall of -10.8%. With CoreLogic’s numbers in mind, Darwin’s unit market investors were financially the worst off, with fall in rental prices of around 27.9% over 12 months.
Sydney and Melbourne
Being affluent cities with strong markets, Sydney and Melbourne have been providing investors with rapid price growth in selected areas. The average gross rental yields however, have been less significant, at around 2.9% and 3.0% respectively.
Both cities are popular amongst residents, being the top contenders in terms of resident migration. The annual population growth is around 1.8% in Victoria, and 1.4% in NSW, with many analysts claiming that a saturation of new apartments will be snapped up rapidly, leading to further decline in financial yields.
Sydney has a well-structured CBD, but it is compact and has a vacancy rate of just 2.1% according to SQM Research. It is estimated that this will not lead to a problematic oversupply of accommodation any time soon however. This is similarly the case in Melbourne, where there is a vacancy rate of around 3.1%.
Brisbane and the Gold Coast
The norther territories might want to avert their gaze here, as it’s not such great news for investors. Brisbane’s vacancy rate is slowly rising towards 5%, according to SQM.
According to CoreLogic, house rentals have fallen by around -0.9% in the Sunshine State. This decline occurred over a 12-month period leading up to September 2016. During this time unit rents were down by -2.5%.
Despite Brisbane and Darwin struggling in the housing and unit rental sectors, both were ranked among the top performers for their average gross dwelling yields. Brisbane hitting around 4.2% whilst Darwin sat at a comfortable 5.0%.
Other top performers according to CoreLogic were Hobart, at 5.2%, Adelaide at 4.0%, and Canberra sitting on a further 4.0% gross rental yield.
When we observe considerable changes in the residential housing sector; influencing price inflation as a consequence, rental yields are expected to dip. We’ve seen this happen over the past three years in certain locations.
On the plus side, investors can get excited about ongoing low interest rates, making cash flow management much more straightforward. The low interest rates have also made it much more sustainable to manage cashflow in many instances.
It’s important to remember, however, to not turn a blind eye, hoping that the levee will never break. Now is most definitely a time to act in order to bolster your cash flow. Today is a time to think about what you can do as an investor to make yourself less vulnerable to the demons of debt, and how you can secure your foothold.
Strategies to put in place might be fixing up an older property and charging it out at a higher rental price. Look towards your team and whether they are working towards minimising vacancy rates. Think about whether you have a decent-sized cashflow buffer too.