Melbourne's Rental Property Market Highly Lucrative
Property investors interested in buy-to-let properties usually seek markets that offer both high rental yields and capital growth opportunities. Exceptionally low rental yields in most metropolitan markets in Australia may lead to assumptions that the Australian property market is less attractive to investors, because it offers comparatively lower yields than most markets around the world.
This assumption is completely misguided. Not only has capital growth on Australian rental properties been remarkable, but rents have also risen smartly for several years. Growth in housing values has been more robust than rates of rent increases, which is exactly the reason why rental yields have been depressed. In fact, with strong rental and capital growth, Australia's property market currently offers the highest value to investors in rental properties.
Buoyant housing market with exceptionally strong property appreciation has yielded unusually high capital returns to apartment investors in Australia. Property prices in Australia have been growing at a compound annual rate of about 10.4 per cent and have doubled every seven years.
This year, they have increased by 18.4 per cent, and in some local markets such as Melbourne's, even by as much as 24 per cent from the year earlier. This significant capital growth has been a major reason why many property investors, especially foreign, have flocked to the nation's lucrative apartment market.
Rental growth has also been quite strong, especially by international standards. The rental market in most locations in Australia has been in a severe imbalance since the early 2005. Robust population growth, especially in the metropolitan Melbourne, and strong labor market have driven rental vacancy rates to their lowest on record. Currently, rental vacancy rate in the most pressed markets is between 0.9 and 1.5 per cent.
In the case of Melbourne, which has 98.5 per cent of its rental properties occupied, this means that out of 369,000 rental homes only 5,535 properties are available to rent. The severe deficit of available rental housing has prompted fierce competition among renters, giving a boost to rents. As a result, in the current tenants' market, rents are growing by as much as 6.5 per cent per year. Even when adjusted for inflation, this growth is spectacular by any means.
While eroding affordability has been a cause of concern for many investors, factors that influence the underlying demand for properties suggest that capital growth is likely to remain robust in many markets, especially in Melbourne. A persistent shortage of new housing units in the market is expected to increase as housing faces higher demand from a boom in population growth, strong employment, and rising incomes.
These factors will also support continued growth in rents. As a result, lucrative returns on rental properties in major Australian local markets should continue to appeal to investors in search for attractive property investment opportunities.
