Another day, another bemusing set of real estate data, and another mainstream media outlet looking on the bright side. This time it was RP Data’s release of Australia’s highest yielding suburbs and its fawning reproduction by the weekend edition of the Financial Review.

According to RP Data, relayed dutifully by Michelle Singer in the Weekend AFR, “returns in key inner-city suburbs hit 7 percent to 9 percent over calendar 2008” based on an RP Data study of “median prices and average gross rents to identify highest-yielding suburbs for houses and units in each capital city.”

RP Data found that the suburb which had the highest yielding apartments was Sydney’s exclusive Woolloomooloo, allegedly returning to owners a gross rental yield of 9.4%. RP Data claimed that the median rental amount was $650 per week (which appears reasonable) but somehow came up with the median apartment value as being $360,000. This seems somewhat low, given Woolloomooloo is an exclusive harbour-side suburb, home to the likes of Russell Crowe.

The scepticism appears to be matched by Australian Property Monitors and, which listed 37 apartments for sale in Woolloomooloo. While certainly not an exhaustive sample size, the listed properties on had a median price of $650,000 (and an average asking price of $765,000). Similarly, Australian Property Monitors found that Woolloomooloo apartments have a median price of $625,000.

Based on those medians, Woolloomooloo’s gross rental yield is somewhat less glamorous 5.2% (almost half the yield claimed by RP Data). Crikey contacted RP Data to determine how they came up with a median of $350,000 for Woolloomooloo, but the company did not respond to enquiries before deadline.

The slowing economy is also raising questions on the numerator side of the yield equation, with the five-year run of increasing rentals appearing to ease in recent months. While RP Data noted that “rents rose [by] an average of 10.8 percent in 2008 across capital cities”, a more sombre Sydney Morning Herald claimed on 7 December 2008 that:

Rents on apartments across the lower North Shore and eastern suburbs [of Sydney] are tumbling as the finance sector sheds jobs, existing renters reach breaking point and lower interest rates make buying a property more attractive.

The median rent on a one-bedroom apartment in Kirribilli and Milsons Point fell 15.9 per cent in the three months to the end of September, official figures from NSW Housing show.

The slowing rental market was also revealed by a recent study by SQM Research which found that nationwide vacancy rates increased from 2.1% to 3.3% in the year to December 2008.

In analysing the findings, RP Data boss Tim Lawless told the AFR that “on one hand, we have ideal buying conditions and many properties are now in positive-gearing territory. On the other hand, confidence in market conditions is very low. So investors are still largely inactive.”

While Lawless claimed that properties are able to be “positively geared”, his claim appears to be based on a comparison of gross rental yields and current bank variable rates. However, using gross rental yields as a benchmark figure provides misleading results. (It would be like a share market investor calculating a company’s price-earnings ratio based on the company’s ‘gross profit’, rather than its net profit). For example, a gross yield of 8% actually becomes a net yield of around 4% after the investor pays property management costs, insurance, maintenance, depreciation, body corporate charges, council rates and water service fees. Therefore, even with variable rates dropping to around five percent, most investors would not actually be able to ‘positively gear’ their investment properties once all costs are taken into account.

That is not to say solid (albeit still negatively) yielding residential properties do not exist. Inner city Melbourne and Sydney, much of Darwin, and many low-priced ‘affordable’ suburbs do provide very strong rental yields and low vacancy rates. But potential property purchasers should be conducting their own research before believing everything they read.