Melbourne property investors vulnerable as rental yields remain at record low

Monday 08 May 2017

Article by Tom Watson

A new report on the Melbourne property market has highlighted the potential vulnerability of investors in the Victorian capital, with “record low” rental yields one of several factors that could cause future home loan repayment stress.

Melbourne property investors vulnerable as rental yields remain at record low

The research, compiled by property investment firm Momentum Wealth, found that rental yields in Melbourne were some of the lowest of any capital in Australia - 2.7% for houses and 4% for apartments.

When combined with external pressures, such as out of cycle rate rises, Momentum Wealth Managing Director Damian Collins stated that investors could begin to find themselves under increasing pressure to make repayments on their loans.

“The research report explains that with the combination of record low yields, record low income growth and rising interest rates, investors who have negative cash flow on an investment property will find it increasingly difficult to meet their loan repayments,” said Collins.

“This will particularly be the case if lenders continue to make out-of- cycle rate hikes for investment loans while rental yields remain constrained, and will most impact those with tighter cash flows.”

Investors with interest-only loans have been hit particularly hard by recent rate hikes, with Mozo data showing a number of lenders increasing interest rates on investment loans by more than 0.25% in the past few months.

The report also revealed the extent of the divide in house and apartment growth in Melbourne, with house values increasing 14.2% in the year to February 2017 compared with just 3.3% for apartments over the same period.

“The research report forecasts this growth disparity to continue, with apartment values even beginning to fall in the short term,” said Collins.

“This is likely as demand for apartments wanes following the reintroduction of stamp duty for off-the-plan purchases by investors, the new vacant property tax and tighter lending conditions.”

Collins stated that these factors combined may have a potentially detrimental impact on the Melbourne apartment market which is already at risk of oversupply thanks to thousands of apartment approvals in the last five years centered in inner city areas.  

Are you concerned about potential mortgage repayment stress? Now could be a good time to consider switching to a lender with a more competitive interest rate. To compare a huge range of options make sure you head over to the Mozo home loan comparison hub.

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