Housing price growth continued to outpace rents, squeezing rental yields lower in April.

Housing prices rose by 1.7 per cent on average in the state and territory capitals in April according to CoreLogic RP Data’s Home Value Index  .

Annual growth was 7.3 per cent, compared with 7.9 per cent over the year to April 2015.

“While we’ve seen capital gains moderate substantially after peaking last year in Sydney and Melbourne, dwelling values continue to trend higher, just not as fast,” CoreLogic RP Data research director Tim Lawless said.

At the same time, rents were unchanged on average in April and down by 0.2 per cent through the year, reducing rent as a percentage of the home value, the gross rental yield.

In April the average rental yield on a capital city home unit was 4.2 per cent while for a free standing house it was 3.3 per cent.

Yields were already uncomfortably low a year earlier, when units were yielding 4.5 per cent, while the average yield on a house was 3.6 per cent.

Yields are lowest in Sydney and Melbourne, where demand from investors is strongest, suggesting recent market entrants are using a negative gearing strategy to reduce their after-tax cash flow losses, Mr Lawless said.

With the chance of an interest rate rise for the time being very low, demand looks likely to remain high, he said.

“Similarly, as long as taxation policy continues to support investment in the housing market, we are likely to see investors remain as a substantial component of housing demand due to the lacklustre returns evident in other asset classes such as cash, bonds and equities.”