by John McGrath
Rental returns on houses in Australia’s capital cities have been rising by an average 3.3 per cent per year, every year, since 2009. That’s a bit above the whole-of-Australia average of 2.7 per cent.
But things are starting to change. Capital city rental growth has dropped over the past 12 months to an average of 2.4 per cent – well below that five year average of 3.3 per cent. Only one city –Sydney, has recorded a growth rate over the past 12 months that is above the average (four per cent).
Four per cent growth is great – but when you take into account that Sydney house prices are up around 15 per cent over the same period, you get a net result of reduced yields.
Capital growth should always be your No 1 focus when investing in real estate. But yields are important too because they’re going to pay the bulk of the mortgage while you hold the property waiting for capital growth. So when yields start declining, we tend to see a drop in investment purchasing too. And that’s what seems to be happening in NSW right now.
Investment activity in NSW was at a record high in January this year with 53.4 per cent of all new home loans going to investors, according to Australia’s largest mortgage broker, AFG.
But it appears January was the peak. Over the next five months, investment activity tapered to 45.9 per cent by June. That still makes NSW the No 1 state for investment activity right now but the decline in activity is still significant.
After a major increase in property values over 2013/14, Sydney is becoming less affordable for investors in terms of purchase price and yields. Latest RP Data figures put Sydney’s typical house yield at 3.7 per cent. A year ago, it was 4.1 per cent. The typical apartment yield today is 4.5 per cent. A year ago it was 4.9 per cent. Yields of 3.7 per cent and 4.5 per cent aren’t terrible, but let’s compare them to QLD – where investment buying has ramped up over the same period in which NSW has declined.
The typical house yield in Brisbane right now is 4.5 per cent compared to Sydney’s 3.7 per cent. Apartment yields are even more impressive at 5.3 per cent compared to 4.5 per cent in Sydney. PLUS – Brisbane property values haven’t moved anywhere near the rate of Sydney and Melbourne in recent times. Sydney’s current median house price of $745,000 and Melbourne’s $590,000 makes Brisbane look seriously cheap at $475,000.
When you put affordable property values next to high yields and perfect timing in the cycle, that’s an ideal time to buy and investors are noticing. AFG says investment activity in QLD has jumped from 33.5 per cent in January to 38.7 per cent in June. A lot of that activity is in Brisbane but key regional centres are also attracting attention.
For example, our office in Townsville estimates that 50 per cent of investment sales are going to North Queenslanders and up to 40 per cent are going to Sydneysiders. Investors are attracted to newer houses around $350,000 to $450,000 and small sites with development potential.
The Sunshine Coast is also attracting investors, mainly in the $300,000 to $500,000 range. McGrath Buderim says new apartments near the new hospital and older-style renovator homes close to the ocean are popular.
Toowoomba is also a hot spot. Our office estimates 50 per cent of investor sales are to locals and 25 per cent are to Sydney investors, with a few from Melbourne too. Houses from $300,000 to $450,000 and brand new apartments from $280,000 are among the top picks.
If you’re looking for Australia’s next hot spot for investing, look no further than Brisbane and South-East Queensland.
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