Residential property yields

IBISWorld forecasts residential property yields to rise by 0.24 percentage points in 2024-25 to 3.05%. Robust population growth – stemming from high immigration - coupled with a limited housing supply has intensified pressure on the rental market, pushing rental prices up by 7.8% annually—the highest surge since 2009. The national vacancy rate dropped to a critical low of 1.2% in September 2024, reflecting a severe scarcity of rental properties. Rising construction, borrowing costs and lengthy planning approvals have hindered new developments, exacerbating the shortage. However, recent tax changes have encouraged investment in housing, softening the severity of the supply shortage. This includes the Managed Investment Trust (MIT) Withholding Tax Reduction - effective from June 2024 - and the Increased Depreciation Rate – effective from May 2023 - which helps towards building-to-rent tax incentives. The cash rate has remained elevated into late 2024 and is expected to remain high in 2025, further stimulating the rental housing market as fewer people can afford to buy a home due to more expensive loans, creating more incentive to rent. These factors have driven the notable rise in residential property yields across Australia in 2024-25.

Rising residential housing prices over most of the past five-year period have weighed on residential property yields, boosting the total value of dwellings. A low-interest rate environment from 2020-22, combined with several tax initiatives like negative gearing and the capital gains tax (CGT) discount, has driven strong demand for residential property from owner-occupiers and investors. Speculative property investment has also led to strong residential housing price growth, especially over the past two years, as investors have returned to the market following the onset of the pandemic. Volatile demand conditions also hit rental markets throughout the COVID-19 pandemic, with border restrictions limiting demand from key markets, such as international students. At the same time, residential housing prices soared over the two years through 2021-22, despite the COVID-19 pandemic, with falling interest rates driving strong demand from owner-occupiers and investors.

Negative gearing legislation in Australia allows investment property owners to make a net loss on their property during the financial year and use this loss to claim a tax deduction on their taxable income during the same year. This practice can discourage property owners from raising rents substantially despite incurring a loss, as they can claim a tax deduction while still maintaining an asset that typically increases in value. The CGT discount also contributes to rising housing prices as investors pay tax on half of the capital gains if a property is purchased and held for at least 12 months. This further encourages investors with a positive outlook on property to enter the market and has driven additional demand for property and boosted property prices over the majority of the past five years. Overall, IBISWorld forecasts residential property yields to fall at an average annual rate of 0.04 percentage points over the five years through 2024-25.