In this episode, Damien and Jeremy review and fact-check claims made in an article on rental yield, separating genuine opinion from claims that can (and should) be tested against historical data. Jeremy deliberately doesn't name the article's author, noting they generally produce good content, but that this particular piece contained some misleading claims worth addressing.
What Is Rental Yield?
Jeremy defines rental yield as annual rental income expressed as a percentage of a property's value. Using an example of $50,000 in annual rent on a $500,000 property (a 10% yield, described as an unusually high example), he notes something closer to 4% is more typical.
Reasonable Opinions About What Drives Yield
Jeremy first addresses claims he considers reasonable, if unverified, opinions rather than proven facts: that a property's size and condition are the largest influence on rental income, that larger properties with more bedrooms and living space typically command higher rent, that newer properties often achieve a rental premium while poorly maintained properties underperform, and that amenities like a pool can boost rental potential (particularly in warmer climates). Jeremy notes he hasn't specifically tested these claims against data, and while none strike him as obviously wrong, he stresses the importance of distinguishing reasonable opinion from verified fact, noting that his own team's views are similarly shaped by years of experience, but should still be flagged as opinion where they haven't been directly tested. Damien adds that added rental income from features like a pool likely also comes with added maintenance costs, meaning any yield benefit should be considered on a net, not just gross, basis.
Fact-Checking Claim 1: Do Regional Markets Underperform Capital Cities?
The article claims regional markets and small towns often have higher rental yields due to a scarcity of rentals, but experience slower capital growth due to abundant land supply and lower population-driven demand, implying investors face a trade-off between yield and growth in regional areas.
Jeremy tests this directly, comparing capital city growth (Sydney, Melbourne, Brisbane, Perth, Adelaide, and other state capitals) against all other ("regional") markets from January 1990 to the end of October 2023, a period of just under 33 years. The result: the two growth curves track remarkably closely together over the full period, with recurring cycles of divergence and convergence (one group pulling temporarily ahead before the other catches up, generally as affordability differences self-correct), rather than one category consistently outperforming the other. Jeremy notes this same crisscrossing pattern shows up reliably whenever he compares long-term growth curves between different market categories.
Jeremy's broader point: claims about one category of market outperforming another can often be manipulated simply by choosing a favourable start and end date for the comparison, rather than reflecting genuine long-term outperformance. Based on the full 33-year data set, he concludes the claim that capital cities reliably outperform regional markets doesn't hold up.
Fact-Checking Claim 2: Does High Yield Mean Low Growth?
The article also claims that if a property's gross rental yield sits around 6% and isn't expected to change, the chances of capital growth exceeding 4% per annum are "very slim," and more broadly, that properties outside capital cities are likely to see total returns under 10% (implying capital growth under 4%).
Jeremy tests this directly by isolating historical markets with a gross rental yield in the 5.5%–6.2% range (roughly 6%) and measuring their actual capital growth rate: 7.7% per annum, nearly double the 4% figure claimed in the article. By comparison, markets with a more typical (lower) yield of under 5.5% showed capital growth of just over 6% per annum, meaning the higher-yielding cohort in this analysis actually achieved stronger capital growth, the opposite of what the article claimed.
What This Means for Investors
Jeremy and Damien discuss why this matters practically: investors are generally seeking strong cash flow, strong growth, and low risk. Based on this analysis, higher-yielding markets have historically delivered comparable or better capital growth, better cash flow (by definition), and lower risk, since more expensive properties concentrate more capital into a single asset and have historically shown greater price volatility than cheaper markets. Damien recalls the period around the 2018–2019 federal election, when proposed changes to negative gearing created uncertainty that temporarily affected higher-priced property markets, before prices recovered strongly once those changes didn't proceed.
Closing Thoughts
Jeremy concludes that the article's claim, that a high rental yield is a "red flag" indicating a property isn't in an "investment grade" location, isn't supported by the data reviewed in this episode. He notes the term "investment grade" tends to be applied loosely to more affluent, higher-priced ("blue chip") suburbs, despite those same markets historically showing greater volatility, and therefore greater risk, than cheaper markets. Damien and Jeremy close by thanking listeners and encouraging likes, subscriptions, and shares.