While many experts are predicting property values to remain relatively flat, rental yields are expected to strengthen further during the current housing shortage.

Cameron Kusher, senior research analyst with RP Data, noted that on a rolling six-month average basis, construction of new investment houses dropped by 7.9% in November 2008 compared to the month earlier. Over the year to November, the value of investment housing sank 17.9%, with volumes currently sitting at levels equivalent to those seen in mid-2007.

"The implication of fewer dwellings being built for investment and fewer existing properties being purchased is that the shortage of rental properties is likely to continue," he said.

Kusher said this trend would be particularly evident in capital city areas where rental vacancy rates are already below 2% in Sydney, Melbourne and Adelaide.

"With underlying demand increasing due to rising population growth, the housing shortage and the rental shortage situation is likely to become exacerbated," he said.

"On the flipside, for those who own or are thinking of purchasing investment properties, it's anticipated that rents will continue to rise as property values remain flat. The by-product of these rental increases will be continuing improvements to gross rental yields. These improvements in yields may also be enough to encourage investors back into the market in mid to late 2009, particularly those investors that are driven by yield rather than short-term capital growth."

Over 2008, all capital cities recorded significant improvements in their average gross rental yields, with Darwin recording the largest increase of 0.81% to 6.47%, according to RP Data. Perth came in second, gaining 0.76% to reach 4.23% while Sydney added 0.58%, rising to 4.93%

Source:RPdata