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Shrinking Rental Yields to Drive Out Investors, but Not This Year

Lower rental yields might cause investors to lose interest in the housing market, but according to ""Capital Economics"":https://mail.google.com/mail/u/0/?shva=1#inbox, that scenario is unlikely to play out this year.


Currently, the increase in home prices is outpacing the rise in rents, which ""is weighing on rental yields,"" the firm noted in a report authored by the property economist Paul Diggle.

For example, national home prices in January rose 9.7 percent year-over-year, according to ""data"":http://www.corelogic.com/research/hpi/january-2013-home-price-index-report.pdf from CoreLogic, yet the ""Consumer Price Index"":http://www.bls.gov/news.release/archives/cpi_02212013.htm shows rents rose by just 2.7 percent during the same time period, the report noted.

However, Capital Economics stated the reduction in rental yields is actually ""very gradual"" and the ""the total return from housing remains attractive."" Thus, investors, who analysts say are driving the recovery, are not expected to exit the market just yet.


By the firm's own measure, average gross rental yields (annual rent payable on a property divided by the current value) is down from a peak of 5.55 percent in early 2012 to 5.31 percent for the fourth quarter. And, the firm's forecasts for home prices and rents suggest gross rental yields will average 5.1 percent through this year. At the same time, Capital Economics expects the 10-year Treasury yield to end the year below 2 percent.

Even though rental yields are shrinking, the firm expects an 8 percent increase in home prices this year, so investors should still see a ""healthy"" return.

Though, it's just a matter of time before investor demand can no longer be relied upon to drive the recovery.

""Within a couple of years, fewer distressed homes for sale, prior price gains leaving less potential for capital appreciation, and lower rental yields will make the investment case for housing much less convincing,"" the report stated.

If investors leave the market, this means mortgage-dependent buyers will need to step in and pick up where investors left off, the report explained.

In fact, one area though where investor interest seems to have strayed is Phoenix. According to the firm, the city has seen prices rise 23 percent over the year.

""[W]e've been hearing that, as a result, the city is quickly becoming a no-go area for many institutional investors,"" the report stated.

About Author: Esther Cho


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