When investing in property, there are generally two considerations for income. The rent, which is your money now, and capital growth, which is your money later ( ideally).
Looking back over late 2020 through to early 2022, with finance cheap (via low interest rates) and money coming sooner rather than later via rapid capital growth, rental returns took a backseat for many investors, with buyers willing to accept a lesser yield upfront just to get into the market. The Sydney and Melbourne markets in particular were shining examples of this kind of approach, with Sydney showing a median rental price of $600 per week by the start of 2022 against a median sale price of circa $1.6M. While the two don’t necessarily have to line up, that's a rather meagre 1.95% gross yield on the rent. To be fair though, it was pretty easy to disregard $30K in gross rent against a $400,000 rise in median house price over the course of 2021.
Fast forward to today, and with interest rates back to “normal” and capital growth settling back down to more sustainable levels (or even taking a break in many areas) rental yield has come back to front of mind for many. Again using those capital city markets as a benchmark, anyone that bought in February this year anticipating the market to repeat 2021 has probably had a bit of a shock - with their cost of debt now double and those same costs dropping the budgets of their prospective buyers, eating up any capital gain potential, at least in the short run.
Coming back locally, our median house price sits a little over $500,000 against a median rental price of circa $530 per week. That translates to a (slightly better than) 5% gross yield, with even stronger returns achievable in many instances. While it might not have the sex appeal of the headline grabbing capital growth we’ve seen of late, it does mean that investors have a far better chance of reducing their holding costs, and in the case of those with good cash reserves, generate positive cashflow. And lets face it, cashflow is often king.
Higher rental yields aren’t good just for the cash either, as they also mean better support for investors and being better able to weather the storm of higher interest repayments and other costs. This helps insulate owners against tough market conditions, generally leading to fewer defaults, less forced sales and more consistent pricing long term.
The news might look grim for property, but not all areas will land the same. With affordable pricing, high rental demand and that all important yield remaining positive, Cairns should enjoy a softer landing than most.