Capital growth and rental yields: considerations when investing

3 mins reading

In the dynamic world of real estate investment, understanding the interplay between capital growth and rental yield is crucial. Over the last few decades, Melbourne’s real estate market has witnessed significant transformations, emphasising the importance of a holistic approach to investment decisions, according to Kay & Burton Senior New Business Manager Megan Taylor.

While discussions often revolve around rental yields and the undulating nature of rental returns, there is a tendency to focus on short-term gains. However, a retrospective analysis of Melbourne’s housing market reveals an impressive tale of consistent capital growth. CoreLogic Research Director Tim Lawless analysed 30 years of data, which noted Melbourne recorded a remarkable 459 per cent increase in dwelling values in the three decades to July 2022, averaging 5.9 per cent per annum. Melbourne notched the highest long-term growth rate among all capital cities.

“Melbourne’s median house prices, showcasing substantial appreciation, have long established real estate as a resilient and profitable long-term investment,” Ms Taylor said. “Capital growth is often regarded as the bedrock of successful real estate purchases and it’s important to consider this for an investment property as well. Investors adopting a patient and strategic approach, which considers capital growth when making investment decisions, have reaped the rewards of substantial appreciation in property values.”

However, Ms Taylor noted each investment strategy is personal, emphasising the importance of aligning investment decisions with individual goals. For those prioritising a regular and consistent income, exploring suburbs with stable median rents in high demand would be of benefit. Conversely, if the objective is long-term investment, a thoughtful consideration of the sustained growth potential in those suburbs is prudent.

“Drawing from historical data, investors can gain valuable insights into the performance of specific areas, enabling them to make informed decisions aligned with their wealth-building objectives.”

CoreLogic’s analysis revealed over a 30-year period, there have been six distinct cycles of growth and an equal number of cycles of decline, emphasising the cyclical nature of housing markets. Despite these cycles, the long-term trend remains undeniably upward.

“Taking a balanced approach to capital growth and rental returns will ensure that investors, are well-equipped to make good investment decisions,” Ms Taylor said. “Considering a long-term perspective will help ensure fluctuations in rental pricing and short-term changes to the real estate landscape will not impact the overall success of the investment.”

In compiling this article, Kay & Burton relied upon information supplied by several external sources. This article has been provided for general information only regarding the changes to Victorian property tax and must not be construed in any way as legal or financial advice. Although high standards have been used in the preparation of the information, analysis, views, and projections presented in this article, Kay & Burton does not owe a duty of care to any person in respect of the contents of this document and does not accept any responsibility or liability whatsoever for any loss or damage resulting from any use of, reliance on or reference to the contents of this article.