The Residential Review: August

Australia’s rental market has moved through an unusually turbulent period. For many years, rents rose broadly in line with earnings growth. Since the pandemic, that relationship has become far less predictable. Strong net overseas migration, tight vacancy and limited new housing supply pushed annual rental growth across the capital cities into double digits during the peak two-year period between late 2022 and early 2024. Growth has since moderated from those exceptional highs but remains elevated. Cotality reported annual rental growth of 5.9% across Australia in the year to July 2026, up from 3.4% over the same period in 2025.

HIGHER RENTS ARE STRETCHING HOUSEHOLD BUDGETS

For the approximately three million renting households nationally, the market remains difficult. Rental availability remains below average, vacancy rates are still low, and affordability has deteriorated materially since the pandemic. Oxford Economics estimates that individuals are now spending around 30% of income on rent nationally, with Sydney the most stretched of the major capitals. 

While affordability is beginning to act as a constraint on how far rents can rise, the near-term balance of demand and supply still points to continued pressure, particularly in locations where migration, international student demand and delayed first-home buyer activity are keeping more households in the rental market for longer.

BUDGET CHANGES DRAW A LINE IN THE SAND FOR INVESTORS

The newly legislated Federal Budget reforms have added another layer of uncertainty for residential investors. With negative gearing eligibility removed for existing dwellings, investment decisions are likely to become increasingly dependent on rental income and capital growth prospects, particularly while borrowing costs remain elevated. 

Official loan commitments data is not yet available to confirm the full impact of the changes. However, early lender indicators suggest investor applications for existing properties are already materially lower than a year ago. If sustained, this could reduce the flow of new private investor-owned dwellings into the rental market and place additional pressure on already constrained rental markets over time.

The impact will not be uniform. Sydney is likely to be more exposed, given high entry prices, stretched affordability and lower rental yields. Melbourne still has more room for rents to catch up after a period of weaker growth. Brisbane remains undersupplied, but easing capital values as highlighted in July’s Cotality data may start to deter investors. Across all three markets, the common thread is that weaker investor activity would arrive at a time when vacancy rates remain low and the current-day supply pipeline is still struggling to keep pace with household growth.

At the same time, the changes may accelerate the shift towards purpose-built rental housing and increase investor focus on markets with stronger rental growth prospects, more attractive yields and improving affordability fundamentals.

COMING SOON: OUR RENTAL MARKET OUTLOOK

Mortgage lending data due later this month will provide an important indicator of how investor behaviour is changing in response to the Budget reforms. We will publish our rental outlook in September, but the early findings point to a market that remains under pressure in the short term before gradually moving back towards a more sustainable relationship with income growth and household incomes.