This could be a moment of consolidation for investors as new data shows the stellar, post-Covid growth in rental income is coming to an abrupt end.
Instead, investors seeking to expand their portfolios should be looking at the prospects of capital growth.
And, if you’re in the market to add another property to your portfolio, then it’s worth studying not just the attractive price trends taking hold, but the likelihood of another value spike when the Reserve Bank of Australia finally cuts the 4.35% interest rate.
The pace of rental growth has fallen to its lowest level since 2018, according to new research from the industry analyst, CoreLogic. It rose 0.4% in the final quarter of 2024.
However, it would be churlish to ignore the fact that rents have risen between 20-40% in many areas because of the housing crisis.
This crisis has not only seen prices rise but caused weekly rents to leap an average $171 a week.
CoreLogic says the pace of national rental growth has been decelerating for a while, with rents up 4.8% in 2024 after surging 8.1% in 2023.
Nothing lasts forever. CoreLogic says affordability is now the “significant drag on rental growth”. In other words, you can’t keep increasing rents that people can’t afford.
CoreLogic says rents have increased by 36.1% nationally since Covid – that’s $8,884 a year ($171 a week)..
Renters now spend 33% of annual pre-tax income to service the median rent – the highest level since CoreLogic began tracking rental trends in 2006.
A third of pre-tax income on housing is usually enough to get a loan. But of course, high rents prevent many people from saving even a small deposit.
CoreLogic says the situation is causing many young people to stay in the family home longer or to enter shared housing arrangements.
Significantly for investors, vacancy rates remain incredibly low. Their all-time low of 1.4% in November 2023 has edged up to 1.9%. Even at this level, it’s unlikely a rental property is going to sit empty for long – and that’s good news for investors.
Below, we’ve outlined some of the key financial metrics for property investment:
Rental Yield: This shows the return on your investment as a percentage of the property’s value. There are two types of yield that we’ve outlined directly below:
Gross Rental Yield: The calculation is: annual rental income, divided by the property purchase price x 100. It’s a quick sum but not super-accurate because it doesn’t include expenses.
Net Rental Yield: The calculation is: annual rental income, minus expenses, divided by the purchase price x 100. Use this approach, and you should gauge a picture of profitability.
Does yield matter? Yes. Higher yields generally mean better cash flow.
Cash Flow: This is another important consideration. You may not want a profit or positive cashflow, because that means you’ll pay tax on your profit. Many investors operate at a loss to utilise negative gearing. Instead, they aim to profit from the property’s rising value.
Sounds complicated? It is. You should always consult a financial advisor or accountant – not just about your first investment but each one that follows.
**NOTE:* The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.
