Why lower priced property has a higher rental yield
It's a well known fact that higher priced property tends to rent on a yield far less than lower priced property. But why is this the case? Why doen't a luxury house in Sydney's Eastern Suburbs rent on the same yield as a house in the Western Suburbs?
Let's take a look at the stats to first confirm this theory.
| Location | Median Price | Yield |
|---|---|---|
| Palm Beach | $2.7 m | 1.25% |
| Rose Bay | $1.7 m | 2.86% |
| Penrith | $300k | 5.03% |
| South Grafton | $195k | 6.40% |
(source: Your Investment Property: Feb 2010)
Looks like the theory holds up!
So to help us get to the bottom of this topic we sought the advice of a number of experts - Cameron Kusher of RP Data, John Londeman of Residex, Chris Gray of Your Empire, Mark Armstrong of Property Planning Australia and Micheal Yardney of Metropole Property Strategists.
Here are the top three reasons why lower priced property has a higher yield:
- Supply and demand. Accommodation at the low end of the market is sought by households who generally have no other option but to rent, whereas rental at the high priced end of the market is more discretionary. Most people at the high end can afford to buy so there is generally less demand for expensive rental properties which means the price drops.
- Land to asset ratio. Land makes up the capital growth component of an investment whereas the building forms the income component. On more expensive properties there is a higher land to asset ratio so rental yield will be lower.
- High level of home ownership. Australians have one of the highest concentrations of home ownership in the world and the Capital gains tax free status we have for owner-occupied properties means that people who can afford it, repurchase rather than jump back into the rental market.
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