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The Sun-Herald

Rents tipped to rise but returns will fall

Rents are expected to grow in 2010 but rental yields will begin to slide as the Sydney property market moves into stage two of the investor driven growth cycle.

The Sydney property market returned to double digit growth in 2009 driven mainly by first home buyer demand. The low interest rate environment and first homebuyer boost enticed many out of the rental market into their own dwelling.

However the first homebuyer surge was only short lived. As interest rates turned the corner many first homebuyers began to leave the market while investors saw their opportunity to return. A significant drop in first home buyer lending at the same time as a jump in investor loans late last year highlights this trend.

First home buyers make up a reasonably small section of the market place and have a limited purchasing power. Investors on the other hand are a much larger group and usually have significant wealth behind them.

I expect first home buyers will continue to leave the market and will be replaced with investors this year. As this trend gathers momentum in 2010 the property market will really begin to move and growth will exceed 2009 levels.

First home buyers will return to the rental market and put upward pressure on rents. At the same time investors will increase rents looking to cover increased lending costs.

While there is no doubt rents will grow this year the return of investors will propel property values at the same time. Essentially rents are unlikely to keep pace with price growth and yields will fall.

The real winners this year will be experienced investors who purchased property some years ago. As property prices and rents grow in 2010 these investors will reap the full benefit. Not only will they have increased equity but their rental yield relative to the purchase price will grow freeing up more cash flow.

Investors should take head from two important lessons from this period of the property market cycle.

1) The early you get in the better off you will be
2) The longer you stay in the easier it gets.

Mark Armstrong is a director of Property Planning Australia. www.propertyplanning.com.au