Rental rates are rising at a slower pace than dwelling values, and a compression in rental yields across each of the capital cities is expected to occur.
According to the August RP Data CoreLogic Hedonic Home Value Index, the only regions where yields have moved higher over the past 12 months have been across the Adelaide and Hobart apartment markets.
Across the combined capital cities, the typical gross yield on a house has reduced from 4.1 per cent to 3.7 per cent over the past 12 months.
RP Data research director Tim Lawless said the most significant yield compression is taking place in Sydney and Melbourne.
“Over the past year we have seen Sydney’s gross rental yield fall by 47 basis points, from 4.1 per cent to 3.6 per cent,” he said.
“In Melbourne, where rental yields are even lower, we have seen gross yields fall by 32 basis points over the year to reach 3.2 per cent gross.
“Given the current rate of value growth and moderate rental growth, it won’t be long before Sydney yields have moved below those of Melbourne.
“With yields so low in the cities where values are seeing the largest capital gains, it is clear investors remain very much focused on value growth rather than yield,” he added.
RP Data also said investors are currently comprising their largest proportion of new mortgage commitments since late 2003.
In fact, investor loan commitments have accounted for more than 38 per cent of all mortgage lending for nine consecutive months, the longest period ever that investment lending has held above that level.
“Investors are mostly concentrated across Sydney and Melbourne apartment markets where capital gains have been strong but yields have been pushed very low,” Mr Lawless said.
“Potentially there are better investment returns to be had in the smaller capital cities where the growth trend is less mature and yields are healthier.”