Key Highlights

  • Combined capital-city gross yields reached 3.77% in October, the highest since May 2015.
  • Investor Mortgage rates close to 7% can leave a geared property thousands of dollars a year in the red.
  • Sydney values fell 9.4% over the year to October, while rents still rose.
  • Yields are rising as values fall, so the return gap depends on the cost of borrowing.

Falling prices and rising rents have pushed rental yields in Australia's Capital cities to their highest level in more than a decade. Reports said the combined-capitals gross Yield reached 3.77% in October, the highest since May 2015. But with investor mortgage rates now close to 7% after Tuesday's rate rise, the sums still don't work for most leveraged investors, and from July next year some will lose the Tax deduction that softened the gap.

The figures are from the November Home Value Index, released on 2 November.

Where yields are highest

A gross yield is a year's rent divided by the property's value, before any costs. It rises when rents climb faster than prices, or when prices fall.

The figures show the national gross yield at 3.9%, with houses at 3.7% and units at 4.7%. By market:

  • Darwin: 6.4%
  • Regional WA: 5.3%
  • Hobart, Canberra and regional SA and Tasmania: 4.4%
  • Perth: 4.2%
  • Melbourne: 4.1%
  • Sydney: 3.5%

The combined-capitals figure of 3.77% is rounded to 3.8% in the tables.

Both forces are at work. Sydney values fell 9.4% over the year to October, according to reports, while house rents there still rose 4.6% and unit rents 3.0%. When rent rises and value falls, the yield climbs faster than rent growth alone would suggest.

That is an important distinction. The yield on today's value matters to a new buyer. An existing owner's Cash Flow depends on the price they paid and the Loan they carry.

The problem is the cost of borrowing. Research director Tim Lawless said "High Holding Costs go well beyond investor mortgage rates that are now close to 7%".

On yields, he said "they are still nowhere near the levels needed to deliver a neutral or positive cash flow".

The Reserve Bank lifted the cash rate 25 basis points to 4.85% on 3 November, the fifth increase this year. If lenders pass that on, borrowing costs for investors will rise again.

Each 0.25 percentage point rise on a $640,000 loan adds $1,600 a year in interest. For a grandfathered investor on a 39% marginal rate, that is about $976 a year after tax.

Hypothetical example: the cash flow on a typical capital-city property

Hypothetical example: an investor buys an $800,000 established property in a capital city with a gross yield of 3.77%. They borrow 80% of the price, or $640,000, interest-only at 6.9%. They earn $150,000 a year in salary, which puts them in the 37% tax bracket, or 39% including the 2% Medicare levy. The figures are illustrative only and ignore depreciation.

  • Annual rent at 3.77%: $800,000 × 3.77% = $30,160.
  • Annual interest at 6.9%: $640,000 × 6.9% = $44,160.
  • Other costs, such as council rates, insurance, property management and maintenance, assumed at $7,000.
  • Total costs: $44,160 + $7,000 = $51,160.
  • Net rental loss: $30,160 − $51,160 = −$21,000.

To break even before tax, this property would need a gross yield of about 6.4% ($51,160 ÷ $800,000). That is roughly Darwin's current yield, and around 2.6 percentage points above the capital-city average.

Scenario A: a grandfathered investor

If the investor bought before 7:30pm AEST on 12 May 2026, they are grandfathered under the new rules and can keep negatively gearing the property.

  • The $21,000 loss reduces their Taxable Income from salary.
  • Tax saving at 39%: $21,000 × 39% = $8,190.
  • After-tax cost of holding the property: $21,000 − $8,190 = $12,810 a year, or about $246 a week.

That outlay is the bet investors make on capital growth. With the index reporting capital-city values down 4.8% over the year, the bet has gone the wrong way for many recent buyers.

Scenario B: an established home bought after the cut-off

Now assume the same investor bought the same established property after the 12 May 2026 cut-off.

Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, negative gearing for residential property is limited to new builds for purchases after that time, applying from 1 July 2027.

  • In 2026–27, the loss can still be deducted under the existing rules.
  • From 2027–28, the $21,000 loss cannot be used to reduce tax on salary.
  • The full $21,000 a year, about $404 a week, would have to come from the investor's own pocket, rather than $12,810.

The difference is $8,190 a year. Lawless noted that investors will "no longer have the same negative gearing benefits from July next year".

A newly built property bought after the cut-off keeps access to negative gearing. That is one reason the changes are expected to tilt investor Demand towards new stock. Capital works deductions on a new build can also improve the after-tax result, although they generally reduce the property's cost base for CGT purposes.

Units, and the alternatives

Units carry a higher yield. Applying the national unit yield of 4.7% to the same $800,000 example gives rent of $37,600 a year.

With the same $51,160 in costs, the loss falls to $13,560. That is smaller, but still a loss, and for an established unit bought after the cut-off the same loss of negative gearing applies from 1 July 2027.

Some investors are also weighing alternatives. MacroBusiness, in an opinion piece, said high-interest savings accounts are paying more than 5%. That claim was not sourced, and rates on such accounts vary and often depend on conditions.

What to watch

Key dates for investors running the numbers:

  • Early December: the next Home Value Index will show whether yields keep rising as values fall.
  • Lenders' responses to the 3 November rate rise, which will set the next round of investor loan rates.
  • December 2026: the Mid-Year Economic and Fiscal Outlook. No exact date has been published.
  • 30 June 2027: the last day before the negative gearing limit applies to established homes bought after the cut-off.
  • 1 July 2027: the start of the new negative gearing rules and the CGT change to indexation plus a 30% minimum tax for gains accruing from that day.