Today’s Age Artice Higher Rentals Seen as Spur for Investment by Chris Vedelago is a good prompter to peer behind the curtains of rental yield.

Despite the headline quoting a new report saying that gross rental yields are at an attractive 5.5% for investors, CommSec’s Craig James sums it up nicely:

“Investors are concerned just as much about getting a good capital return over time, and many are prepared to endure relatively low (rental) returns if the end result is higher capital gains down the track,” he said.

Returns in Sunshine West were the highest for apartments at 6.5%. The cost of the apartment averages $235,000, but due to tightness in the rental market, property owners can charge higher rents because of scarcity. Thus they have a lower capital outlay but a higher return due to the state of the overall rental market and their ability to capture economic rent.

What James alludes to above is that the real return investors look for is in the capital gain. With our tax system supporting the profit motive in housing, there is an incentive for speculators to buy and sell in the top end of the market (for bigger capital gains) rather than in affordable housing where it is so desperately needed.

With the recent Eddington report promoting a new East-West tunnel, one expects that speculators will be buying up in Sunshine West to capitalise on any future gains delivered by such infrastructure projects. With capital gains per property having delivered $30,000 – 50,000 to an investor’s portfolio over recent times, why would a property owner have any incentive to go through the rigmarole of employing a rental agent, advertising for tenants, repairing the property in accordance with the rental act, when all they are really after is the easy profit so they can re-finance and borrow more money from the bank to buy more land.

The rental market is being held to ransom by these factors. With the REIV publicising incorrect vacancy stats, the ‘marketed scarcity’ is helping their members ratchet rents up higher and higher. This began when the property lobby began their ‘rental yields are too low/ record low vacancies‘ campaign in January 2007. Check more realistic vacancy levels at

Re the lack of housing dwellings mentioned in the Age article, Bubblepedia deducts form the 2006 census:

The rate of increase in the number of dwellings in Australia exceeded the rate of growth in the number of people in Australia by 41%. The rate of increase in the number of empty houses was 2.7 times the rate of population growth.

Until there is a Site Rental on all land, we will continue to see all of society’s efforts undermined by those rationally using the tax system to their advantage. Then, with the difference between yield and land price more closely aligned, the ‘return for all’ guaranteed by recycling economic rents increases the supply of affordable housing whilst reducing taxation.