Does growth always follow high yield?

Read this article today that suggested growth always follows yield by @Chris White

http://www.pillarproperty.com.au/rental-yields-can-indicate-where-the-opportunities-are/

I've heard it before that growth always follows a high yield. Obviously yields go down when prices go up, but in general does buying at a high yield always result in growth eventually? and does this mean that a property with a lower yield may not grow as much as one with a higher yield?

Sorry if these questions seem silly.

 

No it doesn't. Check out properties in Zeehan Tasmania - very high yields but still not worth much more than a year's salary for houses.

 

I haven't read the link yet so not sure of the context.
But there are plenty of regional places with high yield and no prospect of growth any time soon.

 

Hello,

I have a silly question what is high yield / growth to you?
I think regional areas will struggle to grow both in yield / growth over the next year or two.
The economy is sluggish!!

 

Plenty of historically low yielding properties in Sydney's Eastern suburbs have grown amazingly for decades.

Plenty of mining towns had high yields and many are worth only a fraction of what they once were.

 

Remember high yield is also a reflection of risk.

Look at the mining towns - yields are probably quite good.

 

What about looking not comparing yields between different areas, i.e. regional versus metro, but only comparing yields in areas versus historical yields for that same area. For example looking at yields in Western Sydney during a boom phase 4.5-5% versus in a depressed phase 7-8%. Is that what you mean @ej89

 

someone once told me that properties have an approx 10% return. 3% yield and 7% growth v a 7% yield and 3% growth sort of thing.

Dont know if it is correct, but sounds nice.

 

It's certainly not the reverse.

Following growth are developers.

Following developers are a glut of properties.

Following a glut is vacancies and stagnant rents.

So while growth doesn't always follow yield - it's where I'd rather risk my money.

One good example is Elizabeth in SA.
It was famous for 8% yields, the investor market wants this and the demand comes. Now these 150k properties are 200k.

 

Ps it's important to know why the yield is high. Some dodgy and dangerous reasons that stats report high yield are:
-Market crash ie everyone moving out of town. Historical rents will show high relative yield
-risky short term single industry, eg a mine that will close in 10 years
-high costs, eg Logan QLD has very high strata and Rates so properties appear high yield but it's not as good as it looks

 

Glad one of my articles is causing some debate. The above comment from hotmail is spot on and is what the article is about. i.e. comparing historic yields in the same areas.

So not saying that an 8% yielding rural or mining town area will compress to a 5% yield.

Yes, the yields in some Sydney and Brisbane inner suburbs are less than 4% now however, have tracked at around 5% only a few years ago and have been known to drop to a 'low' of around 4% in boom times (after which time the growth has petered out). So from mine, I would only buy in these suburbs at around 5%+ yield.

Some areas that are now at 5% yield have cycled to around 4% in the last decade or so - maybe there are some opportunities in these for growth or yield compression?- there of course many things to consider however yields can be a good indicator of where a suburb is at.

These things are cyclical. Values increase, yields drop, values level, rents increase..............etc...

 

If the area has good fundamentals (employment prospects, disposable income, location etc whilst supply is on the lower side) then yes.
A lot of high yielding places don't have that though, and the poor fundamentals bring risk and high yields are necessary to compensate the investment.

 

I was going to reply in defense of your article as I think it's spot on, it's nothing to do with regional vs capital cities but current yield vs historical yield for a particular suburb whether it's Lane Cove, Mt Gravatt or St Kilda.
It gives you a good indication where a market is all things being equal. After a boom yields are low, prices flatline for a number of years or drop slightly, there's potentially oversupply due to excessive development, rents go no where. Then building activity slows, the market is weak for a while, but then supply starts being taken up. Vacancy rates decrease, therefore rents start to rise, maybe even sharply. Over several years yields have suddenly increased and purchasing there makes more sense for investors while for renters they start to see that there is little difference between renting or buying so many take the plunge.
So the cycle starts again.

 

I am not talking about buying into areas based on high yields and saying that they will increase in value but rather examining the value proposition of an area based on that areas history with respect to yields - as "one method of ascertaining value". Of course the fundamentals will also come into play and need to be considered however, yields can tell us if an area is in potential danger of leveling out.

Lets look at the Coogee graphs below. We can stretch these back a long way but for the purposes of the exercise let assume that to 2005 is consistent with the longer term averages.

Yields have compressed to 4% at their low and then growth goes sideways for a while until rents start picking up again and yields rise. When yields rise investors take notice........

Its important to also consider what happens after values rise and more people revert back to renting. I think the same article also talks about that.

Based on the charts below - who would buy in Coogee right now????

 

Hi @Chris White , not to burst your bubble but I have not read your article I actually learned about this idea from John Lindemanns property book where he analyses property statistical trends of which one of them is historical rental yield. That book is quite amazing and really puts the property cycles into statistical perspective by backing it up with numbers and figures

 

I see yield as analogous to PE ratio on shares.

Similarly, neither high or low tells us much but seasonal change and industry change (or suburb change in the case of RE) may tell a story.

E.g. if investors have sold an area down to an extent that yields are high, then perhaps it'll gradually go back til that normal yields. Or vice versa.

 

I haven't read Johns book but its all common sense when you have been through several property cycles and pay attention to what happens - it rhymes

 

Yes, agree and I think its certainly an indicator that more people need to pay attention to!

 

Hi @Chris White I absolutely agree with you, it is like the cycle of nature that doesn't change. And that is why we can take advantage of it as investors and is provides a weather report of what is to come

 

I have quoted this a number of times to but I learnt this from my father and I don't know where he saw it.

When a boom happens growth increases and yields drop however once the peak of the boom happens people work out they can rent for much less than buying so they look at renting. This then creates more demand on rentals which increases the yield however the property price doesn't change much so a lower growth happens.

A pretend example;
If a property was growing at 6% and had a 4% yield and then a boom happened it might turn to 7% growth/3% yield. As there is a huge flurry in people buying but rents cannot keep up and the people buying might be investors so more supply but less demand (due to OO buying their own). However after the boom it change to 6% growth 4% yield and then 5%growth & yield. At this time people go hey it is cheaper to buy than rent so growth starts to pick up again!

 

Thanks for the opinions. Yep. Seems as though comparing it to it's past helps, although in saying that, I found a weird one in Ipswich where it grew 37% in 2 years back in 06-07 yet the yield stayed at 6%. What would be the reason behind this @Chris White