Cashflow comes to the rescue

Many commentators hope that property market prices are on the rise again, but there’s a much more likely prospect in store for property investors, because rents are about to start rising dramatically.

Property investors have two strings to our bow – cash flow and growth, and the recent media focus on prices has pushed cash flow into the background. This is understandable, because capital city rental yields are currently at lows that landlords haven’t had to deal with since the early fifties and seventies.

There is currently little incentive for investors to get excited about property, but while we don’t always experience both cash flow and growth at the same time, our major cities have always consistently delivered either high cash flow or good price growth at different times.

This is clearly demonstrated in the graph below, showing you the average annual rental yield and house price change for Australian capital cities from 1901 to now. 

Rental_Yield_and_Price_Changes

The graph shows that during the years when Australian capital city house price growth was low or even went backwards that rental yields boomed at the same time. The correlation is close because our capital city populations (apart from Darwin in 1975 after Cyclone Tracy) have always been rising. This in turn means that if new households can’t get housing finance the demand for rentals rises.

How many years does it take for rent to equal a house price

The years are grouped together in the way that they appear in the graph because they show you another statistic – the number of years that it took for the rent received by a landlord to add up to the value of a house. In other words, from 1936 to 1939, it took just four years of rent to be the same as the value of a house. But right now, it would take twenty-four years of rent to equal a current house price.

Years_Rent=House_Price

The stats are out of kilter, as the table below shows. Rental yields are way below their historic long-term average, housing prices have gone up too much, although they certainly haven’t boomed, and rents are too low to make housing a viable option for investors.

Rental yields are well below their long-term average

Table

Yet our big city populations keep growing, with most of the new households coming from overseas and interstate, generating an immediate rise in the demand for housing, especially in Sydney, Melbourne and Brisbane. The issue is that most of these new arrivals can’t buy houses or units – they have to rent for a number of years, until they are sufficiently established to be able to obtain housing finance.

While the last few years have seen a massive fall in investor owned housing stock in our major cities, rental demand from new arrivals has been shooting up. History shows us what happens next – that massive increases in rent are highly likely to occur over the next few years.