In the April issue of API mag page 87 the recommended formula to calculate real value is annual current or achievable rent divided by average rental yield for the last 5 years (fr, say Residex) – can anyone tell me is this is correct? Help
Maybe, but to me this is yet another of those useless stats they dream up to over-psycho-babble-analyse everything.
If you are looking to a rent versus property price stat to help you decide whether to buy or not, you will go mad.
There are so many variations on rental returns it is impossible to categorise every micro market into one category. A more accurate guide would be affordability. It doesn't matter what the rent return is, if people can't afford to buy it, the property is over-valued. Rent returns may be relevent to investors, but as a group they don't influence prices very much, if at all except in a micro market like, say, Mildura.
The other problem is the prices that properties sell for are often way out of balance with the rents due to the ever changing and unrelated cycles of sales and rental returns.
For example; if an area has an average rent return of 10%, does this mean the property is undervalued? not necessarily. If the average rent return for an area is 4.5% does this mean it is over valued? Not in my book. It is what it is. It simply means the prices have boomed but the rents haven't caught up in all probability.
The price of the property won't suddenly contract that much to bring the rents in line with some figure the stats freaks have dreamed up. This has been proved in the latest post-boom "correction". The average drop of prices across Sydney, the worst affected area of the correction in the country, was only 5.9%. The rent returns are still crap even now that they are rising, but the house prices haven't plummeted, so on this basis they are not overvalued. What has happened though is the prices have stalled due to affordability.
Real value of property is what people are paying for it NOW. This could be over-heated as is the case during a boom, but that's what people are paying at the time. The prices stop going up when the affordability drops too low.
If you want to know what the real value of a property is, forget the stats and look in the real estate agents' windows for a month, or pay a qualified valuer to tell you.
may be right for commercial property as its value is linked to yield but as MARC says look in the real estate agents window or pay a valuer as rents on residential properties has lagged behind the growth of property values for the last 12 years and are just starting to increase now. The value of a residential property is determined by what someone will pay to live in a particular area and is usually motivated by human emotions rather than by a formula based on yield. A valuer will look at what other similair properties have sold for in the area to determine a market price.
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