Rental yields versus Property price appreciation

During lunch few days ago, my colleague said she got to know that Australia homes does not have good rental yields. I explained briefly why. Typically, rental yield would be low when the property prices increase much faster than the rental rate. Assume you bought a condo few years ago and rented it out. Today, the market price for your condo has increased. Let’s say it has increased 20% or about 6% per year. Would your rental has increased so much if you were still renting to the same tenant? Chances are no. Even if you found a new tenant, would the new tenant be willing to pay 20% higher rental so that you can maintain your yield? Of course, the fortunate thing is, you bought it much earlier, so your yield is much higher compared to those who are buying the same apartment today.
housing priceIn Australia, the typical median price for a landed property in Melbourne as at end 2013 is AUD643,000. Look at the median housing price in Melbourne and you can see that the price increase from 2005 onwards has been rather steep. There were just no way that rental can keep up with the price increase. Thus, rental yield would continue to be low.
Nevertheless, these days you can see in newspapers that there are opportunities to enjoy good rental yields and the property price of perhaps just half of the median home price in Melbourne. How could this be? Well, look at the actual size of the home being sold. Chances are, the sizes are now becoming ever smaller and it’s typically nearby Universities. Thus, the rental yield can still be maintained because there are a lot of foreign students studying in Australia.
What is ‘rental yield is always good’? If rental yield is always good, it only tells you that there has not been huge capital appreciation. 🙂  Come on, choose one. Do not be like a friend of mine whom when I asked, what is her main priority for buying a condo in Puchong. She said I want good rental and good capital appreciation. Good rental and good capital appreciation would typically find it hard to sleep on the same bed. Choose one. The plus point though is that after a while, capital appreciation does happen at least due to inflation.
written on 29 Jan 2014
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  1. You are right property prices run faster than rental rates.

    1. I think 2014 may give some time for rental to catch up a bit.

  2. Bartholomewew avatar

    Can you explain what drives rental yield to increase? Thank you

  3. What drives rental yield to increase?

    1. Rental lags price. If price does not increase so much then rental yield better. Or else rental yield will forever b bad.

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