INSIDE INVESTOR: The quiet revolution in property investment

Investors chasing yield have a short-term window to generate strong returns on an investment property.

There is a quiet revolution going on within the world of property investment.

Home owners have become far more conservative. Fewer people are selling up and buying elsewhere.

But bank lending figures compiled by the Australian Prudential Regulatory Authority indicate that investors have plunged back into the property market.

Traditionally, the yield on property has been well below the yield obtainable on the stock market.

But the drop in property prices in recent years, and a shortage of rental accommodation in major centres, particularly Sydney, has seen rents rise strongly. Those two factors combined have created a historic opportunity.

Vacancy rates have fallen to just 2 per cent, indicating an extremely tight rental market. Perhaps part of the explanation is that first home buyers are absent from the market and are opting to stay in rental accommodation.

Nationally, the average yield on a two bedroom apartment is approaching 5 per cent. That’s extremely attractive when compared to the yield on shares, bonds, term deposits and almost every other asset class.

The picture is even more attractive when interest rates are taken into account.

Last month the Reserve Bank lowered the official cash rate to 2.75 per cent, its lowest level on record. The commercial banks passed on that full cut. That has helped boost the net yield on property to its highest in almost 30 years.

No wonder property investors are jumping in. But these kinds of opportunities never last for long.

Prices either rise –  thereby reducing the yield –  or more dwellings are built that increases the supply of rental accommodation which then reduces rents.

Both those forces are at work now.  In Sydney, building approvals suddenly have taken off after a two year hiatus. Melbourne, which had the strongest construction of any capital city during the past two years, now is in the doldrums.

If you are thinking of an investment property, in addition to the old real estate cliché of position, position and yes position, you must give serious thought to yield; the potential return on the money you plan to spend.

Price is just one factor in that equation. Rental income is paramount and of course, interest repayments are also crucial.