Capital Gains & Rental Markets Over Five Years

Article published by RP Data

12th November 2010

During the last five years, capital gains in the housing market have been lower than the preceding period however, conditions have been such that rents and values have increased by fairly equivalent amounts during the period.

 During the five years to September 2010, the Australian residential property market has experienced a variety of conditions, modest growth conditions in 2005/06, rapid appreciation in 2007, falling values in 2008 followed by another strong growth phase in 2009/10. Despite the range of conditions over this five year period, overall property values have increased at the average rate of 7.1% year on year. 

 Property values across the combined capital cities have increased by a total of 40.5% for houses and 42.2% for units over the last five years. On an average annual basis this represents growth of 7.0% for houses and 7.3% for units. In dollar terms, house values have increased by a total of almost $140,000 over the last five years and unit values have increased by approximately $123,000.

Five years ago, house values were 18% greater than unit values and as at September 2010 the differential was recorded at 17% indicating that the price differential has remained relatively consistent over the period. With median house prices currently recorded at $485,000 and units at $415,000, affordability factors have likely contributed to the superior performance of units to houses over the period.

 Over the same period rental rates have also ramped up and, similar to the capital gain performance, the growth has not been uniform from year to year. Between September 2005 and the end of 2008, rental rates were typically trending upwards at the rate of almost 11% year on year. In 2009 capital city rents increased by just 0.9% and we are now seeing the first evidence of rental growth once again returning to the market.

Whilst the gap between house values and unit values has remained quite consistent, the gap in rental costs has closed markedly. During September 2005, rental rates for houses were 6.7% greater than unit rents, today the gap has closed to just 2.8%.

In terms of rentals, house rents have recorded the greatest increases in Darwin (76.5%) and Perth (60.2%). Rental growth has been comparatively less in Adelaide (32.6%), Brisbane (32.7%) and Sydney (33.8%).  For units, Darwin has again recorded the strongest value growth during the past five years (99.8%) followed by Adelaide (69.6%). Unit rental growth has well and truly lagged in Sydney (27.8%) and to a lesser extent also in Brisbane (44.8%).  Unit rental growth over the last five years has also recorded significant increases in Darwin (84.0%) and Perth (61.7%). The three largest cities have recorded the lowest levels of rental growth at 39.6% (Melbourne), 40.6% (Brisbane) and 42.8% (Sydney). 

For houses, if you purchased at median prices during September 2005, we estimate the current gross rental yield would be recorded between 5.7% (Sydney) and 10.7% (Darwin). Whilst for units the current yield is recorded between 6.9% (Brisbane) and 12.3% (Darwin).  Overall the results highlight the virtues of having a long-term hold strategy in relation to property purchases with property values, rents and subsequently yields having historically proven to increase over time. Over the next 12 months we are anticipating fairly flat growth in property values however, we do expect that rents and yields will improve. With an insufficient supply of homes, upwards pressure will remain on housing prices over the long term, however price inflation will be offset by affordability constraints which will hamper prospective purchaser’s ability to enter the residential market. As a result, competition for rental accommodation is likely to intensify and weekly rents will rise. These conditions highlight just how imperative it is that Government’s find a solution to housing supply issues, as the national graphs highlight, over the last five years conditions have been such that either property values have increased, rental rates have increased or both have been climbing. Supply is clearly a large contributor to these prevailing conditions.

* All Hobart data is one month in arrears