Positive cash flow investment properties have become increasingly scarce, with new analysis showing just a small handful of suburbs could deliver positive returns under current market conditions.
New data has shown that just a minuscule amount of suburbs are likely to deliver positive cash flow under current market conditions, with regional mining towns in Western Australia and Queensland dominating the list.
According to Cotality’s latest analysis, just 0.8 per cent or 38 suburbs could deliver positive rental returns, as more investors shift their focus to generating cash flow.
Cotality research director Tim Lawless said when it came to net yields, determining the potential for positive returns was like a “proverbial needle in a haystack”.
He used the example of an investor assuming a 20 per cent deposit on a 30-year principal and interest mortgage term, with an interest rate of 6.34 per cent, and holding costs at 2.5 per cent of the median value.
“On the assumptions outlined above, only 0.8 per cent of suburbs nationally would provide a positive cash flow,” he said.
Of the 38 suburbs, only two were in capital cities, including Melbourne’s Carlton for units, and Darwin’s Berrimah for houses.
An overwhelming majority, 69 per cent, were in regional Western Australia, skewing towards mining towns of the Pilbara, while 10 per cent were in regional Queensland, all located around the Bowen Basin coal mining regions.
Lawless said that in most cases, these markets have shown either higher levels of volatility over time or the capital gains have been low to negative.
“Most investors and lenders would treat these suburbs with a high degree of risk aversion.”
In light of recent tax changes, Lawless said many investors would likely become more attentive to yields due to their reduced capacity to offset rental losses against taxable income.
He also said that, with housing values now trending lower in some markets, an upswing in gross yields was becoming evident in certain areas, particularly in Melbourne.
“Gross yields two years ago were the second lowest of any capital, now they are trending higher to be ‘middle of the pack’ for houses and third highest amongst the capitals for unit yields.”
However, he said that yields weren’t rising everywhere, with May seeing gross rental yields at record lows for both houses and units in Brisbane and Adelaide, and houses in Perth.
“These are markets where housing values are continuing to rise at a faster pace than rents, putting consistent downward pressure on the gross yield.”
He also said yields weren’t expected to rise sharply and wouldn’t necessarily generate positive cash flow, after factoring in costs.
“Under a scenario where capital city home values fell by 10 per cent, and rents rose by 10 per cent, the gross rental yield would only rise by approximately 82 basis points, from 3.45 per cent to 4.27 per cent.”
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