The numbers to make property investment stack up
Several months after the federal Budget changed the rules around negative gearing, attention is turning to how the property investment market might adjust.
According to Loan Market data, investor activity fell immediately following the Budget, although the full impact may take time to become apparent.
One of the big questions now is what would need to change for the numbers to become more attractive to investors.
Ray White Group Chief Economist Nerida Conisbee said the answer could be higher rents, lower property prices or, most likely, a combination of the two.
Rental yields may need to rise
Rental yield measures the annual rental income from a property as a percentage of its value. A higher rent increases the yield, while a lower property price also increases the yield.
Cotality data for July showed the gross rental yield across the combined capital cities was 3.95%, comprising 3.37% for houses and 4.76% for units. However, yields vary significantly between markets.
Ms Conisbee estimated that a gross rental yield of about 5.15% could be required to offset the removal of negative gearing, based on several assumptions, including an 80% loan-to-value ratio, a 6.50% p.a. investor mortgage rate and operating costs equal to 20% of rent.
A yield of about 6.5% would represent another threshold. At that level, rental income after operating costs would cover the interest on an 80% loan, making the property cash-flow neutral before tax.
Rents and prices could both play a role
Ms Conisbee’s modelling illustrates how different combinations of rents and prices could change the investment equation.
If property prices remained unchanged, rents would need to rise by about 30% to increase the current 3.95% yield to the estimated 5.15% hurdle. If rents rose by 20%, the required fall in property prices would be about 8%.
These figures are scenarios rather than forecasts. Ms Conisbee expects any adjustment to occur through both sides of the market, with slower growth in rental supply supporting rents and softer investor demand moderating prices.
Property investment involves many moving parts, including your deposit, borrowing costs and expected rental income. Before committing to a purchase, speak to us about how the lending numbers stack up for your circumstances.