CoreLogic’s latest blog post discussed property returns across the cities, including using gross rental returns. However, these are gross yields, not taking into account the debt burden and servicing costs. The picture changes when do you.
CoreLogic’s conclusion is that investors still have headroom and total returns are picking-up outside of Sydney and Melbourne.
Sydney & Melbourne have seen much stronger total returns than other capital cities over recent years. Recent data indicates returns in Hobart & Canberra are closing in on Sydney & Melbourne thanks to higher yields & accelerating capital growth.
The CoreLogic Home Value Index was released last week and it showed that combined capital city home values rose by 7.5% over the year to October 2016. The most interesting recent development has been the accelerating annual growth trend evident within Sydney and Melbourne. While the change in values is important, it only tells part of the story with the total return also an important figure to focus on.
Annual change in capital city home values,
to October 2016
While the home value index looks at changes in values, the CoreLogic Accumulation Index factors in the change in values over the year along with rental returns. As a result, the Index provides an indication of the total returns from residential property.
When you factor in gross rental returns, the total returns from residential property are actually positive across all capital cities. This is despite values declining in both Perth and Darwin. The total returns index also shows that Sydney and Melbourne are not quite so far out in front. The strong value growth in these two cities is offset by record low yields. Meanwhile, more moderate but accelerating value growth in Hobart and Canberra along with higher rental returns are resulting in total returns in these two cities closing the gap with Sydney and Melbourne.
Total returns from residential property,
12 months to October 2016
Looking at cumulative value growth over the five years to October 2016, Sydney and Melbourne stand head and shoulders above all other capital cities. Over the five years to October 2016 Sydney home values have increased by 62.3% and Melbourne home values are 38.1% higher. No other capital city has recorded cumulative growth of at least 20% over the past five years.
Total change in capital city home values,
5 years to October 2016
Total returns over the past five years indicate the property asset class has performed much better than if you just look at headline value growth. Although Sydney and Melbourne have still recorded the strongest total returns over the past five years, returns in the other capital cities are much stronger once you factor in the rental return performance.
Total returns from residential property,
five year to October 2016
The strong value growth in Sydney and Melbourne over recent years has been a key driver of demand from the investment segment. Over the past year, total returns have begun to accelerate in Hobart and Canberra. Although value growth in these two cities has not been as strong as in Sydney and Melbourne, the superior rental returns are resulting in stronger total returns.
With Sydney and Melbourne having seen much greater value growth than all other capital cities over recent years and rental returns pushing to lower level, the total returns on offer in Hobart and Canberra are likely to remain attractive for investors. Particularly those investors looking for opportunities outside of the two largest capital cities.
