Risks for property investors as yields plummet

Property investors speculating on capital gains need to be careful as rental yields in Sydney and Melbourne hit record lows.

Low rental yields make property investment less affordable and investors more exposed to increases in interest rates, according to The Sydney Morning Herald.

CoreLogic figures show the “gross” yield – before costs – on both houses and units reached record lows in January across Sydney and Melbourne.

The gross yield on Sydney houses in January was 2.8 per cent and in Melbourne it was 2.7 per cent.

Sydney units recorded a gross yield of 3.8 per cent and in Melbourne it was 4 per cent.

“While rental yields plumb new lows, investment in the housing market has been consistently ratcheting higher, which implies that investors are speculating on further capital gains in the housing market,” says Tim Lawless, the head of research at CoreLogic.

The continuing strength of property prices in Sydney and Melbourne has surprised most analysts.

Early last year most were expecting property price growth in those cities to moderate.

But two cuts to interest rates by the Reserve Bank in the middle of last year, continuing high levels of investor demand and an overall lack of supply in our two largest cities have overturned expectations.

Sydney house prices are 16.6 per cent higher than a year ago and Melbourne prices are almost 13 per cent higher, figures from CoreLogic show.

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