Anyone have data history of yield over a long period like 30 years?

I am just wondering how yield grows in comparison to property prices.

I assume income rises at the same rate of inflation.
Property prices rise above inflation.
Logically I don't see how rents can rise above inflation or people would not be able to afford to rent any more.
So if rent rises in line with inflation, then yield would get lower and lower each year, but that also can not happen or it would not be profitable to invest in property.
So I don't see how this can all tie in together.

Also I saw a graph showing that what tends to happen is that
- property rises
- the economy rises, salaries increase, rates rise, and due to combination of higher salaries and higher rates, rents then rise in line with those 2 factors.
So for this reason, rent tends to rise based on inflation, which makes sense since higher rates means investors need higher rents to make their investment profitable.

Another thing I have heard is that prices rise during a growth period, and when it is corrected and levels off, that is the time that rents tend to rise. I don't know if this is true or not, but logically seems like it would work only if the economy and rates rise at this point - how else could people afford higher rents?

One scenario that may make sense is that as population grows, rent increases closer in to a CBD with higher demand, in turn pushing lower income earners further out of the city, so that means suburbs closer in can actually increase yield beyond the rate of inflation. But is this how it works everywhere?


Anyway - 2 things:

1. Does anyone have any idea how it is that growth is over inflation, yet yield can not due to people not being able to afford to rent, yet it can not be the same as inflation or yield would get lower and lower until it is not profitable to invest. Can anyone make sense of this?

2. Does anyone have access to data on yield vs property price over a long period like 30 years?

 

Don't think you will find 30 anywhere RE through the web is fairly young as is all the data sharing.

 

Rent is a better indicator of economical strength and is higly dependent on real wage growth, Our house price growth in last few years has been mostly a function of cheap and easy credit. This disparity between stagnant salary growth(also underemployment) and Cheap &easy credit is evident from the graph below. For Investor Poor yield doesn't matter so much as there has been capital gain expectation and YOY losses are partially funded by Tax payer via NG.

Now imagine what happens to house price when credit tap is tightened, loss claims are getting capped, and IO rates are jacked up relentlessly?

 

Ah thanks for that.

So it looks like rent increases marginally above the rate of inflation.
Yeah just found this pdf, which also seems to confirm that.

Since growth is quite a bit above inflation, can anyone explain how this would not mean yields get endlessly lower and lower over time? So if yield is 4% now, eventually it will go down to 3 and then 2.5 and eventually 2 .. and so on...

This would just make property a worse and worse investment over time without coming back and improving?

What am I missing?

 

Some thing gotta give...

Salary has to rise fast enough with stagnant house price growth,
but can it?

Or house price has to fall.

Property investment on high lvr is a high leveraged bet, great during uptrend and every investor feels they are genius.
What happens when price stops rising or falls for a sustained period of time? With low yield as it is.. sustaining YOY holding costs can push high leveraged Investors to desperation.

High leveraged bets are the primary basis of booms and busts irrespective of markets.

 

really interesting thread , want to keep it up ,+1.

 

Yeah I did not really get an answer out of it as to how yield changes over time.

If it does moves with inflation, then since growth is over inflation, it would be forever decreasing and make property investment a worse and worse investment over time until no one would invest.

If it moves faster than inflation, how to people afford a forever higher and higher percentage of their income going to rent

 

This rule may be losing traction as the years go on but what about the good old theory of $1 of rent for every $1000 worth of property. i.e. $500/week from a $500K property. I remember this was true 20 years ago when I was at uni and true for some areas now.

Obviously there is a sweet spot within the mid range and the fringes of too high and too low will vary. I think as one previous poster mentioned, that there is a lag but as peoples perceived wealth increases as house prices go up so does rent. Not sure if this is in line with inflation or not.

I still am at a loss at how 20 somethings can afford property these days so maybe the rental pool is higher then is was 10 years ago, this might also be indirectly pushing up rents.

Lots of factors

 

Other than capital gains continuing as they have for the last couple of decades to increasingly compensate for higher holding costs due to declining yield or potential interest rate rises, then I don't think you have missed anything. Lower yields and potentially higher interest rates will impact serviceability which in turn will surely test future capital gains. It will be interesting to see how this pans out.

 

The growth of housing has been well above inflation for more than 2 decades. Lets say 3 decades because I am not not old enough to know beyond that.
So you are saying yields have declined for the past 30 years? I'd love to see something showing that. It would mean yields 30 years ago were mind boggling...

 

There's a few of us here who been in the market long enough to know why that chart look that way and the practical effects of those market factors (and ones not mentioned).
One thing for sure is that the market is rarely homogeneous as the charts are.

RE peeps, spruikers and msm like to make nice simple theories as to how rent/price relationships are but in my experience they are rarely reality.

Don't forget that ever changing gov policies are also always affecting the rental and RE markets.

 

You will sometimes see old API magazines from the early 2000s in op shops. These often had price, rent and yield charts in the back.

Another source is old newspaper archives - in the days when they advertised for sale and for rent. Available from major state and university libraries. Or for older stuff online via Trove.

I remember an old Jan Somers book giving figures for Brisbane of $160k property/$160pw rent - ie 5% yield. This may have been the late 1990s. In the mid 2000s almost identical numbers applied for outer Melbourne suburbs like Werribee, Melton, Frankston North etc.

The thing is that while you may have been able to buy on a 6 - 8% yield in a capital city suburb, interest rates were higher prior to the big drop in the '90s after the 'recession we had to had'. So even a 7% yield and 13% interest rates would be a long way from being casflow positive. But if inflation was running at 8-10% then the shortfall between rent and interest should be dropping each year (assuming rents kept up).

 

No stats but a teacher at TAFE once told me he was getting 10% yields in Dingley (se melbourne) in the 80's
Obviously rates would of been higher but its hard to see yields in this sort of area even getting to 3% these days
So realistically all most people invest on these days is capital growth speculation
As wiggle said something has to give. I suspect it will.be the house price
I guess one thing that hasnt been taken into consideration is that most people just view property as a place to live and not an investment
I wonder at what point to the majority of people think its just easier to rent than buy?

 

The chart shown by TheSackedWiggle earlier in this thread indirectly shows this through house prices progressively outstripping rents over a 30 year period. ie. yields are now (approx) 1-275/733 = 62.5% lower than they were back in 1986, so if rental yield is currently 3% it means they were around 8% back 30 years ago. As others have stated, interest rates were much higher back then, which ate away at these higher yields but with interest rates already about as low as they can go, and are likely on the way up, either yields get worse as prices continue to rise or prices stagnate or even fall to keep holding costs at bay.

 

Here's a real eg.
In 1989 a 3B+LUG+big dining+rumpus room was $89,900 and was actually rented for $130pw.
That about a 5.7% net return.
20% min dep, and after expenses loan was about 75,000 at 12.7% = $183wk !!

 

Thanks for the response.

Yea that is what I found from the long term charts is that yield tends to be led by rates which are led by the current economic situation. ie economy boosts, salaries rise, rates rise, rents rise, so in real terms nothing really has changed since the higher rent is offset by higher inflation. And vice versa.

But going by the rest of your post and a previous post mentioning that 20 years ago yield was also similar around 5%, it seems like rent is tied to house price (ie they are relatively stable as a percentage of property price over the long term, but go up and down in the interim based on other factors, in particular current rates).

So that means that since property prices tend to rise beyond inflation, that over the long term, rental cost must rise above inflation, and if that is the case (and if average income rises at the rate of inflation), how is it that people can afford to pay a higher per cent of their salary on rent as time goes by?

Is it that as populations increase, the "popular" more in-demand part of the city expands further out, and the new edges (which might be 10km further out) tend to be the same "real" (ie inflation adjusted) price as the previous edge (say 10km further in) and the properties closer into the CBD increase beyond inflation as they become more premium areas to live? This is the only answer I can come up with to make sense of how rental prices can be a set percent of property prices which both increase faster than inflation (and therefore salaries).

 

I remember the 80's. Inflation was truly insane. Interest on cash in my bank account was 17% at some point if that is an indication.
Check the inflation rate history here and change the start date to early 1970's.
If a house costs 100k in 1973 and 16 years later in 1989 costs 480k actually had not increased in real terms by a single dollar.

So if your yield is 10% and interest rates are 12%, you are not actually any better off than if yield is 3% and interest rates are 5%

 

Generally yields have dropped. The losses landlords face have been somewhat offset by lower interest rates.

People pay rents out of their wages (or benefits). Wages have increased relative to CPI for much of the 2000s. So it's possible for rents to rise faster than CPI but still be affordable.

But that's not all! To the extent that there was an increase in female participation over the 1970s - 2000s that has increased household disposable income faster than individual incomes as more are working. Household income is more important than individual income when it comes to home affordability (whether renting or buying).

Thirdly the CPI is a broad figure and constituent parts have changed at a very different rate to the whole. Eg electronics, appliances, furniture, clothes, junk food and overseas travel are much cheaper than they used to be in real terms. That allows spending for other things - nature abhors a vacuum. Some things are probably dearer in real terms - eg private education and private health.

Whereas each bedroom can only have one bed, there are such things as 'ego goods' where people will spend up to what they can afford, and even sacrifice spending on other things. Housing may well be one of those (again including private education).

Note that things can change - eg we had real wage declines in the 1980s (a deliberate policy of Paul Keating). And we currently have pretty much zero real wage increases relative to CPI.

 

Very well explained post. Thanks.

This makes the outlook more uncertain (or maybe certain to be worse than before lol).

Any idea what are "normal" wage increases over the long term - is it normally along with CPI or above it - and can one even figure this out with the change from single to double household incomes messing up such a large portion of the data?

 

That 12.7% interest rate figure looks very low for 1989 when typical variable rates were 17% HISTORICAL INTEREST RATES AUSTRALIA

The shortfall for a new loan at that time would have been massive - those without a large cash buffer would have been forced to sell and many did.

Maybe the 12.7% was a (wisely entered into) fixed interest loan? Although people with such fixed loans would have kicked themselves when rates dropped.

Also home interest rates were regulated until 1986 with a 13.5% cap applying. While this provided security this limited the ability for interest rate policy to control economic activity as those under the old cap would not have been affected.

Letting banks lend more to housing and less to government debt might also have inflated house prices in the 1960s & 70s. The State of the Mortgage Market | Speeches | RBA