The inverse relationship between price and yield

Property prices and rental yields are inversely related. This means that when property prices go up, rental yields fall. When property prices go down, rental yields rise.

Note that rental yield is distinct from rental income. Rental incomes are pretty static compared to property prices. They do not rise and fall cyclically. The trend with rental income is a slow, steady rise over time, approximately in line with inflation. There may be short term seasonal or economic fluctuations, but these have little effect on the long term steady upward trend.

Rental yield is expressed as a percentage. It is defined as:

In order to see the inverse relationship between property price and rental yield, consider the following numerical examples. Taking a simple starting point it is possible to see how yield changes as the property price increases and decreases. Assuming a property is currently worth £100,000 and produces annual rental income of £10,000, the rental yield can be calculated as:

As the property price increases to £110,000, the annual rental income remains unchanged at £10,000, but the rental yield falls:

The opposite effect can be seen by reducing the property price to £90,000, again holding rental income steady:

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