Dr Gideon Aschwanden and Dr Andy Krause from the Melbourne School of Design in the Faculty of Architecture, Building and Planning say that rental yields are a critical driver of rental and housing costs and acts as a key indicator for property bubbles.

“In this volatile Melbourne property market, buyers want to ensure the safety of their investment. Our recent analysis of property sales and rental returns will better inform investors with location information, helping them to invest their money more securely,” says Aschwanden.

According to the researchers, rental yields of the property market as a whole need to be properly evaluated as they may be a leading indicator of bubble creation. By understanding changes in yields, safety measures can be enacted that may help prevent or dampen a sudden collapse in the market. Buyer’s decisions are driven by costs.

With first time homeowners renting out their property to pay off the mortgage to the point where they can afford it they need to estimate their rental income and property yield. Using a unique dataset of home sales and rentals from the Australian Property Monitors, the researchers investigated the spatial and temporal changes in residential rental yields across the Melbourne metropolitan region from June 2010 to June 2015.

Using data supplied by Domain, they matched properties that have been both sold and rented during the study period. After adjusting for market changes, these two observations were compared, to develop a property-specific estimate of rental yield.

“Starting with the entire metropolitan region, we then calculated yields at the level of local government area (LGA), statistical local area level 1 (SLA1), post code, suburb, and at a property-specific level,” says Aschwanden.

“Looking at the entire metropolitan region, our rental yield calculations allowed us a direct look at variations by neighbourhood, street and even specific building, in the case of apartments,” he says.

The detailed analysis showed that apartments offer higher yields than detached houses. This difference has widened over time, with yields from houses falling off >0.5% from June 2013 to June 2015 while yields on apartments have held somewhat steady since 2013.

“Looking at influencing factors, location shows the highest impact. Within the Metropolitan area of Melbourne, a 6% spread of rental yields ranging between 1.5% and 7.5% is visible. This is much higher than the decline of 0.5% observed over the last three years or the impact of distance to train stations of 0.5%.”

Evidence showing variation within postcodes will help investors to make a much more refined evaluation of the decision to purchase a property. Changes within and between localities may have a more significant impact on returns than changes over time.

This article was first published by The Melbourne Newsroom on 18 May 2016. Read the original article here.