Sydney’s rental market and price-yield forecasts

With Sydney rents at historic highs many people are looking at buying an apartment in order to escape the rental cycle. First-home buyers have the added incentive of being able to access government packages designed to help them enter the property market.

But many potential buyers still worry about risks involved in making such a major investment. Will my Sydney apartment increase in value? Would I be better off staying in a rental?

Investors, meanwhile, need to know whether they are buying a property that will deliver a good annual return and provide the basis for future wealth.

What is rental yield?

Rental yield is the annual profit margin generated from an investment property. There are two types of rental yield assessments: gross and net. Gross rental yield, the most commonly used, is calculated by taking your annual rental income and dividing it by your property’s value and then multiplying the result by 100. 1

For example, if you made $30,000 in annual rental income on a $600,000 property your gross rental yield is 5%.

Net yield is a more accurate guide to future returns because this calculation takes into account expenses such as purchase price, transfer duty, legal fees and property management fees. To calculate your net rental yield deduct all of these fees from your annual rental income, divide this figure by the value of the property and then multiply by 100.

Based on the figures above but allowing for, say, $6,000 in expenses your rental yield would be 4%.

Why are rental prices going up?

According to The Australian newspaper the median weekly rental cost for a property in Sydney is now Sydney $620 per week following a 13.8% growth in rents over the past 12 months. 2

The three major factors driving Sydney’s current rental crisis are a lack of supply, rising demand and an expected surge in immigration. A failure to build more new housing is a major reason for the chronic lack of rental property in Sydney, with vacancy rates now hovering around 1.7% — a fall from 4.0% recorded in 2020.

The NSW Department of Planning estimates that Greater Sydney will need to build 28,500 new homes a year over the next 20 years to accommodate the city’s growing population. 3

Despite the growing demand for housing in Sydney, the construction pipeline has been disrupted by cost increases, bad weather, labour shortages, lack of policy direction and new sustainability targets (‘green tape’).

“The industry’s current and future capacity to deliver projects on time, on budget and on specification is currently a fundamental issue,” says Domenic Schiafone, a director at global consultancy firm RLB. 4

Compounding the problem is evidence that many investors are taking their properties off the rental market. Some are choosing short-term rental options, such as Airbnb, or just selling off their property because of rising costs.

The construction industry, state and federal governments are working hard to address the current shortfall of new housing in NSW, but most observers believe that it will take several years for any of these initiatives to make an impact.

How long will this go on for?

Unless there is a dramatic increase in the number of new apartments and houses in Sydney the situation for renters is unlikely to improve. While the rental crisis has eased slightly over recent months, vacancy rates are at historical lows.

International real estate company CBRE believes that the costs of Sydney rents will continue to increase by around 10% a year as demand continues to outstrip supply. Sameer Chopra, CBRE’s Pacific Head of Research, says that Australia needs 570,000 new apartments over the next three years, but only 55,000 apartments are currently being built. 5

“This significant mismatch between apartment supply and demand will continue to drive continued rental growth in key city centre areas,” he said.

CoreLogic believes that rental growth may have peaked but predicts rocky times ahead, as domestic renters compete with foreign students and new migrants.

According to Westpac 400,000 new migrants arrived in Australia last calendar year, with the figure for 2023 topping 350,000, with many settling in Sydney. 6

How can I stop renting and start owning?

While buying a house in Sydney may be beyond the financial capacity of many people, off the plan apartments are still very affordable. Recognising the pressures faced by renters, the state and federal governments have unveiled a range of incentives which make it much easier for first-home buyers to get into the market.

These schemes include one-off loans, help with your deposit and exemptions from NSW transfer (stamp) duty. Some people may be able to buy an apartment with as little as a 2% deposit. More relaxed criteria mean that buyers can now pool their resources with partners, family members or even friends. 7

Provided that you have saved a deposit and can service a mortgage, there is no reason why you should not be able to transition to home ownership – indeed, in some cases your interest payments may be lower than your current rent.

Economists say one of the reasons for Australia’s property shortage is because so many renters are now becoming owner-occupiers and snapping up new units.

How are apartments performing?

For many decades house prices outperformed apartment prices in Sydney, but that scenario is changing. Research from JLL shows that Sydney apartment prices are now moving in tandem with house prices as first-home buyers enter the residential property market, looking for an affordable alternative to houses.

Many analysts believe that rental yields in Sydney will continue to strengthen due to the shortfall of new stock, plus the large number of new migrants settling in the Harbour City.

According to the national gross rental yield for the 12 months to March 2023 was 4.0%, a slight increase from the previous year, while apartments recorded a 4.4% increase over the same period. 8

Financial advisors usually recommend aiming for a rental yield between 5% and 8%, although regional centres generally deliver better returns than capital cities.

Despite recent interest rate hikes both house and apartment prices in Sydney are expected to strengthen over the next two years, driven by increased migration and a shortage of housing stock. Sydney units performed exceptionally well in the three months to June 2023, recording a 2.6% rental yield. 9

ALAND’s average annual net rental yield across all developments is 4.9% with a vacancy rate of just 0.5%, which compares very favourably with returns for similar apartments across Australia over the past two years.

Investors have been snapping up apartments in The Gladstone Village, ALAND’S new development in Merrylands due to the region’s growing popularity with couples and families. Figures from SQM Research show that the current (July 2023) gross rental yield for an apartment in Merrylands is 5.6%, up from 4.6% for the same period in 2022. Average weekly rents in Merrylands increased by 37.5% in the 12 months, to July 2023 while the figure for the whole of Sydney was 25.19%. 10

3 NSW Planning Department
6 Westpac
8 Property Update
10 Source