Martin Hawes: Property to keep falling

Like many commentators, I think property values will continue to fall. I base this on doing some basic numbers. Those numbers are about yield - the amount of cash you can take from an investment before any capital gain or loss.

When contemplating an investment, any wise investor will first look at the yield on offer. This is so for all investment types - property, shares and bonds - although the language varies for each.

The assessment of yield is always done before any borrowings are contemplated - each investment must be compared with others and to keep the comparison alike, borrowings are excluded. Decisions about financing (whether to gear or not) can be made later.

So let's have a look at yield for residential property. As an example, I take the median house price ($329,000) and the median rental for a three-bedroom house ($320 a week). These medians are last December's figures and may not correlate perfectly but they give a reasonable illustration.

The weekly rental equates to $16,640 a year. We need to make some deductions: two weeks' allowance for vacancy ($640), and rates, insurance and maintenance ($3000).

We could also make allowance for management costs and obsolescence (you will have to replace bathrooms and kitchens every 10 years or so), but I will leave them for this exercise except to note that they will depress the yield further.

After the main costs, the annual rental income will be $13,000. Let's look at this as a percentage to give us the yield: Yield = $329,000 / $13,000 x 100 = 3.95 per cent.

How does this yield of 3.95 per cent compare with other investments? It is not as good as government-guaranteed deposits (the safest investment) and is way below the yield from shares. So, why would an investor buy a house when its yield is so poor?

Many inexperienced investors are clearly speculating on capital gain instead of relying on the foundation of good investment: a decent yield. I have always suggested to clients that they should buy for yield first and the capital gain will look after itself.

For residential property to be attractive, we would need to see average yields at 7 per cent. Either rentals need to rise or values must fall. Rising rentals may take some years and so, to attract astute property buyers with a decent yield, values will have to fall further.