Rising rents increase temperature of the Sydney property market

Rising rents increase temperature of the Sydney property market

Rental rates and property prices in Sydney are rising, but investors may start to look elsewhere if the market looks unsustainable.

Summary:

  • The median rent in the Sydney property market is at a record high
  • Property in the capital has appreciated at a high rate in recent years
  • Yields are low and may force investors to look elsewhere if capital growth cools

Rental rates in the Sydney property market are at their highest ever levels.

Huge demand for rental accommodation pushed the median rate to a record $520 a week in the first quarter, according to the latest Domain Group Rental Report.

There has been a decade of underinvestment in the Australian property market and even though that has changed recently, the effects are still acute. Soaring property prices – dwelling values have increased by 13.5% in the past 12 months – and rental rates are leading to concerns about affordability and overheating.

Rental yields, which is the measure of return that is becoming increasingly important to investors, have declined in most Australian cities as house prices have increased. In Sydney, property investors can only achieve gross yields of around 4%.

Domain Group Senior Economist Dr Andrew Wilson said: “There is no doubt that prices are rising faster than rents at the moment. They’re pushing yields down.”

As some properties have doubled in price in the past decade, currently the country’s investors are still prepared to take low yields as capital growth is so strong. Sydney property prices are likely to continue to rise over autumn and into winter, but whether the market can sustain the rise, especially as more supply becomes available, is far from a certainty.

Once prices begin to fall, investors may start to look elsewhere in search of high regular yields. Other markets such as UAE and UK property have track records of delivering both capital and yield growth.

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