The reasons why property investors are eyeing these cities

2 hours ago 1

Home owners in Sydney and Melbourne are reaping equal returns on their property’s value, despite one appearing stronger than the other, when a broader-than-normal measure of performance is used.

Sydney and Melbourne’s annual total return comes in at 5.1 per cent at the end of August, according to Cotality’s latest Home Value Index. However, breaking down the components – capital growth and rental income – reveals how differently the two cities are performing.

Total return is calculated by combining annual capital gain plus rent received, expressed as a percentage of the home’s value a year ago.

Sydney’s capital appreciation has been greater than Melbourne’s, but Melbourne is producing higher rental income. Buyer preference for each city comes down to whether their plan is short or long-term, experts say.

Melbourne’s dwelling value rose the least of all capitals, increasing 1.4 per cent over 12 months to August, to a median of $803,194, compared with Sydney’s rise of 2.1 per cent, for the same period to reach a median of $1,224,341, Cotality research shows.

Sydney’s capital growth has been greater than Melbourne’s.

Gross rental yield for dwellings in Melbourne was 3.7 per cent, and Sydney’s was 3.0 per cent, as at August 31.

Brisbane was the standout over the year to August, recording annual capital growth of 7.9 per cent, followed by Perth (6.6 per cent) and Adelaide (6.5 per cent). The three registered a total return of more than 10 per cent.

“We are summarising returns in the property market like you might a share portfolio investment,” Cotality’s head of Australian research Eliza Owen said.

“In Melbourne, the rental income makes up more of the property return, whereas rents in Sydney – while still very expensive – tend to make up less because those [capital] values are so high.

“Melbourne might make sense for some investors, despite the additional taxes and charges – the reason being that prices are at a low enough level now that people are willing to start buying.

“Sydney, at this stage in the cycle, has been weighed down by how high values are.”

Melbourne might make sense for some investors, despite the additional taxes and charges, experts say.

For renters whose lease payments are a major slice of a property’s return, the numbers probably paint a sombre scenario.

“Rents in Australia are generally very expensive now, especially compared to what they were about five years ago,” Owen said.

“It’s added to the case for property investment, but it’s pretty depressing if you’re a renter. No doubt there’ll be a lot of young Australians who are thinking about that transition from the rental market to the owner-occupier market as interest rates decline.”

Capital growth tends to motivate investors more than yield, Owen said.

“That’s reflected in the fact that so many investors have shown interest in Western Australia, Queensland and South Australia,” she said.

Buyer’s agent Penny Vandenhurk said savvy Sydney investors were buying properties for their children to live in during university, but doing so when their kids were young, to ensure long-term financial benefits.

“In the last six months, we’ve seen the Sydney rental market soften compared to the craziness of last year,” she said.

“Overall, I don’t think Sydney is the market for an investor if their primary driver is yield. Most investors don’t take a short-term view because they’re chasing capital growth, and that comes over time.”

An imbalance in Sydney between what a property costs to buy, and its rental income has prompted some investors to sell up,” Vandenhurk said.

“Over the last five years, a lot of investors have chosen to leave the Sydney market because the yield was no longer sustainable on their properties, and we’ve seen a significant increase in one- and two-bedroom apartment sales from investors,” she said.

Brisbane has the nation’s highest annual capital growth and attractive rental income.

Brisbane has both bases covered – the nation’s highest annual capital growth and attractive rental income.

Buyer’s advocate Rich Harvey, chief executive of propertybuyer.com.au, said Brisbane was showing no sign of slowing down, propelled by interstate migration, a tight vacancy rate, and Olympic Games infrastructure.

“If you want the best of both worlds, Brisbane is my pick at the moment,” Harvey said.

“I wouldn’t recommend Perth compared to other capital cities because it’s had a massive run and its propensity to go forward is more limited.

“In Sydney, there’s no one-size-fits-all. There’s a number of pockets with good value.”

AMP chief economist Shane Oliver expects Melbourne’s market will make a comeback, following a “degree of scepticism” from investors cautious of taxes and weaker economic performance.

Oliver said Melbourne home owners’ wealth was rising at a slower rate than other capitals, but with stronger population growth than NSW and a lower property price-to-income ratio, that could change.

“When sentiment finally turns around, Melbourne might start looking healthier than Sydney,” he said.

“History tells us there is a rotation between cities, and at some point, Melbourne may come back into favour. That potential is there but right here, right now, it’s just a hope.”