Is rental market full of contradictions, or have renters just been squeezed for all they're worth?
Australia is simultaneously seeing near-record-low vacancy rates alongside a persistent slowdown in rental price growth.
According to the latest Cotality Quarterly Rental Review published on Thursday, national rent values increased by 1.3% in the three months to June 2025, marking the slowest second quarter of growth since 2020.
Across the 2024-25 financial year, rents rose by 3.5%, the lowest annual increase since the 12 months to February 2021.
Yet rental listings totalled around 100,000 Australia-wide over the four weeks to 29 June, or roughly 23% below the previous five-year average.
The national vacancy rate held at 1.6% in June, just a smidgen above the record low of 1.5% seen in early 2024 and less than half the pre-COVID decade average of 3.3%.
The throngs of would-be renters seen massing outside open inspections across Sydney are testament to the fact that supply is tight.
This mix of data seems to suggest that the forces of supply and demand are out of whack – if supply is so constrained, why aren’t rents rising faster?
Of course, when you look at the bigger picture, renters continue to be squeezed within an inch of their lives.
Over the past five years, rents have gone up by nearly 43% nationally, yet wages have risen less than 16% over the same period. In June 2020, the share of pre-tax income spent on rent was 26%. This rose to 33% in December 2024.
Yet with supply so tight, logic would suggest rents should keep climbing.
Commenting on the data in a LinkedIn post on Friday, Cotality’s head of research, Asia Pacific, Tim Lawless (pictured) called this “a fascinating trend”, albeit one with some fairly logical catalysts.
MPA naturally caught up with Lawless to pick his brain further.
Ceiling called on rent rises
While the rental market has cooled, prices are still rising – just more slowly. The main reason for the cooling, Lawless said, is that renters are “probably at the ceiling of what they can actually pay”.
With rent now chewing up a third of renters’ pre-tax income on average, this is hard to argue against. And renters are beginning to adapt their living arrangements accordingly.
“Households are responding by becoming larger as group households reform, reversing the pandemic trend where the average household size diminished,” said Lawless.
Australian Bureau of Statistics (ABS) data published in the Reserve Bank of Australia (RBA)’s February 2025 Statement on Monetary Policy validates this statement. In the capital cities, the average household size grew from close to 2.5 coming out of the pandemic to close to 2.6 in 2024.
While an incremental change, it signals a sharp reversal from pandemic-era trends (households were “disaggregating” during the pandemic, as Lawless put it) which has taken the lever ever so slightly off rental price growth in recent quarters.
Lawless also noted that normalising net overseas migration has helped cool the market.
"Alongside slower population growth… the fact that we’re seeing households becoming larger, which I presume is a combination of group households and multi-generational households becoming more common, that’s helping to take some of the heat out of the demand side,” he said
Australia’s rental market is certainly not going backwards and Lawless expects to see affordability challenges persist for some time. So less of a paradox than a normalisation following years of runaway growth.
Cooling rental price growth could be tailwind for brokers
Although rental price growth has eased up in recent quarters, it has failed to have a noticeable impact on property investors’ appetites.
“Even though we’ve seen the spread between mortgage rates and rental yields widen massively as interest rates rose, we actually saw investor share of the market increasing quite rapidly as well,” Lawless said.
Lawless highlighted that Investors currently comprise about 38% of mortgage demand. “This is a real reminder that investors are much more motivated by opportunities for capital gains.”
While Lawless acknowledged that rental yields are important for servicing loans, “I don’t think it’s the main thing they’re looking for”, he added.
Furthermore, cooling rental prices could ultimately lead to higher volumes.
Given it has the second-largest weighting in the consumer price index (CPI) basket (behind new dwellings purchases), rents have a significant impact on the RBA’s monetary policy.
RBA Governor Michele Bullock has warned that inflation might not be coming down as fast as previously thought, sparking fears that the RBA will hold interest rates yet again in August.
But with rent prices continuing to surprise to the downside, the dovish faction of the Monetary Policy Board will likely feel empowered to cut by at least 25 basis points on 12 August.
That will invariably lead to higher deal flow for brokers, and, funnily enough, higher capital gains for property investors.
