Residential property yields fall sharply around globe

Residential property yields are falling sharply in key markets around the globe, indicating that a simultaneous worldwide slowdown in house prices is possible, Lehman Brothers said in a research note yesterday.

Residential yields (rent as a proportion of capital value) are at record lows of 2.1 per cent in the Republic, 3.4 per cent in Britain and 1.9 per cent in Australia.

In Italy, housing yields are towards the bottom of their historical range at 3.9 per cent and in the US the current net yield is the lowest recorded since at least 1976, although the decline there has been more gradual, Lehman said.

"The historical relationship between house prices and rental yields suggest that very low yields have predictive power in terms of house prices," Lehman said. "In the case of the UK, current rental yields have coincided with peaks in house price inflation in both the early 1980s and the early 1990s."

But Lehman said the current upswing in the international interest rate cycle is unlikely to be of sufficient magnitude to trigger a global housing market crash.

Lehman said bond valuations have been pointing to the cheapness of equity markets for some time and now the residential property market is doing likewise.

Commercial property yields are less stretched than residential yields and this suggests the market's current outperformance can run further, it says.

Prime office yields in major European cities show an unweighted average of 6.1 per cent and most major European commercial property indices are outperforming their local equity market counterparts in the year to date.

The European commercial property market has shown an annualised outperformance of equities of 27 per cent since 2000, Lehman also reported.