The CoreLogic total returns index measures the change in values and the rental return to determine the total gross returns from residential property. The total returns index is valuable for investors as it shows the expectation of returns much like the ASX 200 Accumulation Index provides insights into the total returns (ie change in the overall stock value plus dividend value) for equities investors.
The CoreLogic total returns index is available from the middle of 2005, looking at the change in the index over the 12 years to February 2018, the returns from capital city properties has been substantially higher (196.2%) than the returns across the combined regional markets (136.0%). It should be noted that over that period, value growth was substantially higher across the capital cities than it was for regional markets with values increasing by 83.7% and 29.0% respectively. At the same time, gross rental yields have been substantially higher across the regional areas than they have been in the capital cities.
While over the long-term the total returns have been much greater in the capital city markets than regional areas, the story has changed substantially over recent times. With already higher rental returns in regional markets, the regional markets are now also experiencing higher rates of value growth than those in the capital cities.
Over the three months to February 2018, the total returns from residential property nationally were 0.0%. While the national figure shows flat returns there is a significant difference between returns across the combined regional markets (+2.0%) and combined capital cities -0.4%). Taking a look at each individual capital city and the corresponding rest of state area in each state and territory, the rest of state markets have recorded stronger total returns over the quarter than the capital cities. In NSW, Vic and NT in particular, the spread between capital city and regional market returns is significant.
Although the stronger housing market performance in regional markets may seem like a recent occurrence, looking at total returns, the regional areas have been outperforming capital cities for more than a year. This is due to higher rental yields and improving rates of value growth. Over the past 12 months, total returns were recorded at 5.9% however, returns for regional properties (8.1%) were superior to those in capital cities. Across the states and territories, Melbourne Adelaide and Hobart were the only capital cities in which total returns were superior in the capital city than in the rest of state areas and Hobart was the only city where the difference was substantial. In NSW, returns from regional properties were almost double those in capital cities.
With capital growth prospects likely to be softer over the coming years, investors in residential property may need to be more focussed on total returns (a combination of value growth and capital growth) rather than just capital growth. Regional markets, especially those relatively close to capital cities are currently experiencing relatively strong value growth and superior yields to the capital cities. For this reason, investment in these regions may in fact be a better option over the coming few years than investment in capital city properties.
One important thing to note is that the rental yield component is a gross figure and assumes the property is occupied for 52 weeks of the year. Of course that won’t be the case for all properties and particularly if you are going to invest for total returns you need to choose properties that are highly desirable to ensure that you have the best opportunity to have it occupied throughout the year.