Every single property transactions must occur in one of the five market phases defined in the preceding article. By using hypothetical method, we examine this subject further before concluding that capital growth and rental yield can never travel in a positive direction simultaneously.

We forecast our long-term annual investment returns which are comprised of both capital growth and rental yield as a percentage at each market phase based on this hypothetical approach.

1. Recovery Phase

Market conditions:

As the market recovers from the stressed phase, the oversupply of property is progressively absorbed by the market and prompts for minor correction (usually downwards) in property prices. The rental market is unlikely to change due to lack of housing activity.
CG ↓    RY →

Projected returns: 8% (4% of capital growth and 4% of rental yield)

2. Neutral Phase

Market conditions:

Property prices and rental returns become stagnant as the market reaches its neutral state.
CG →    RY →

Projected returns: 8% (4% of capital growth and 4% of rental yield)

3. Upturn Phase

Market conditions:

During the upturn phase, demand for rental properties begins to grow. This causes vacancy rates to slowly fall and therefore rental yield starts to rise. Property values will gradually increase when investor sentiment in the housing market starts to build.
CG →    RY ↑

Projected returns: 10% (4% of capital growth and 6% of rental yield)

4. Boom Phase

Market conditions:

As the boom continues, the market is flooded with more investment properties. High auction clearance rates mean those properties are being absorbed quickly by the market while property prices continue to skyrocket at a great rate. The low affordability levels lead to a higher demand for rental properties. As the boom phase is usually very short, rental returns fall way behind while trying to catch up with the surging property values.
CG ↑    RY ↓

Projected returns: 12% (7% of capital growth and 5% of rental yield)

5. Stressed Phase

Market conditions:

Oversupply of property for sale causes property values to decrease. With more new rental properties entering the market from the previous boom phase, the rental supply exceeds its demand triggers vacancy rates to rise and consequently rental yield starts to drop.
CG ↓    RY ↓ 

Projected returns: 9% (5% of capital growth and 4% of rental yield)

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