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Low rental yields are making residential property an unattractive investment choice compared to commercial property and shares, says a prominent economist.
AMP Capital chief economist Shane Oliver said gross rental yields on housing are about 2.9 per cent, compared with 6.0 per cent for commercial property and 5.7 per cent for Australian shares with franking credits.
“This means that the income flow an investment in housing generates is very low compared to shares and commercial property, so a housing investor is more dependent on capital growth to generate a decent return," he said.
Over the long term, residential property adjusted for costs has provided a similar return for investors as Australian shares, Mr Oliver added.
“Since the 1920s housing has returned 11.1 per cent per annum, compared to 11.5 per cent from shares,” he said.
"Housing is expensive on all metrics and offers very low rental yields compared to all other assets except bank deposits and government bonds."
Mr Oliver said that while house prices will continue to grow in the short term, with average gains of five per cent expected over the next 12 months, the longer-term outlook is not so positive.
"The residential property outlook for the next five to 10 years is messy," he said.
While low interest rates are expected to lift house prices in the short term, Mr Oliver says this is likely to be constrained by the economic environment and the impact of tougher prudential scrutiny of bank lending by the regulator, APRA.
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