Declining yields suggest caution in Melbourne residential market

Declining yields suggest caution in Melbourne residential market


Researchers from the University of Melbourne have created a system to model and predict house values and rental rates at the individual property level.

The comparison of these two values offers insight into rental yields in the market; an import metric that can be used by buyers, sellers, investors and renters to help make informed choices.

Dr Gideon Aschwanden and Dr Andy Krause from the Melbourne School of Design in the Faculty of Architecture, Building and Planning, say that rental yields are a critical driver of rental and housing costs and act as a key indicator for property bubbles.

“In this volatile Melbourne property market, buyers want to ensure the safety of their investment,” Aschwanden says.

“Our recent analysis of property sales and rental returns will better inform investors with location information, helping them to invest their money more securely.”

According to the researchers, rental yields of the property market as a whole need to be properly evaluated as they may be a leading indicator of bubble creation.

By understanding changes in yields, safety measures can be taken that may help prevent or dampen a sudden collapse in the market.

Property buyers’ decisions are driven by costs. With first time homeowners renting out their property to pay off the mortgage to the point where they can afford it, they need to estimate their rental income and property yield.

Using a unique dataset of home sales and rentals from Australian Property Monitors, researchers investigated the spatial and temporal changes in residential rental yields across the Melbourne metropolitan region from June 2010 to June 2015.

Using data supplied by Domain, they matched properties that have been both sold and rented during the study period.

After adjusting for market changes, these two observations were compared, to develop a property-specific estimate of rental yield.

“Starting with the entire metropolitan region, we then calculated yields at the level of local government area (LGA), statistical local area level 1 (SLA1), postcode, suburb, and at a property-specific level,” Aschwanden explains.

“Looking at the entire metropolitan region, our rental yield calculations allowed us a direct look at variations by neighborhood, street and even specific building, in the case of apartments.”

The detailed analysis shows that apartments offer higher yields than detached houses.

This difference has widened over time, with yields from houses falling off >0.5 per cent from June 2013 to June 2015, while yields on apartments have held somewhat steady since 2013.

“Looking at influencing factors, location shows the highest impact,” Aschwanden says.

“Within the Metropolitan area of Melbourne, a 6 per cent spread of rental yields ranging between 1.5 per cent and 7.5 per cent is visible. This is much higher than the decline of 0.5 per cent observed over the last three years or the impact of distance to train stations.”

The data shows that yields for units vary greatly within Carlton, Fitzroy and Collingwood, with gradual but consistent decreases found as distance from the University of Melbourne and RMIT increases.


Likewise, a wide range of yields for houses was observed in the beachfront suburbs of St Kilda East and West.

Second map

Evidence showing variation within postcodes will help investors make a much more refined evaluation when deciding to purchase a property.

Lyndon Maher, director of product management at Domain, says he hopes the collaboration between Domain and the University of Melbourne will help encourage others like it in the future.

“This project is a great example of what can be achieved when enterprises and universities work together and share resources.

“The findings from the team at University of Melbourne are incredibly useful for investors in Melbourne.

“Domain is always looking for ways to collaborate with universities as part of its commitment to research and development,” he adds.


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