If investors retreat, who houses Australia's renters?

Australia’s housing debate has become increasingly focused on the tax treatment of property investors.

There is a very real human story behind the rental crisis gripping the nation, but the policies shaping property supply are central to alleviating the rental stress that continues to worsen.

Landlords have often been seen as culprits in the rent debate but oversimplified blame games do nothing to create an environment that balances housing affordability and rental supply.

As property strategist Steve Douglas, Executive Chairman, SMATS Group argues, the central problem is not simply who receives a tax concession. It is whether Australia is building enough homes to house a growing population and whether enough of those homes will be available to rent.

“Nationally, a lack of supply, which is far outstripped by demand, has been a continual problem and shows no signs of changing any time soon,” Mr Douglas told API Magazine.

That question has taken on more significance as governments move to make residential property investment less attractive.

From July 2027, negative gearing on residential property will be limited to new builds, while changes to capital gains tax will alter the long-term investment equation. Existing properties purchased before the May 2026 Federal Budget announcement are protected under transitional ‘grandfathering’ arrangements, but investors buying established dwellings after that date will face a different set of incentives.

The policy objective is targeted at redirecting investment towards new housing supply and improving access to home ownership. The risk is that the rental market may feel the consequences well before additional housing is delivered.

Mr Douglas’ argument is that the housing crisis has been clouded by a debate about tax settings, migration and investors, when the more fundamental issue is the failure to construct enough dwellings in the places people want to live.

Landlords, he points out, are not simply competing with owner-occupiers for existing homes. They are also supplying a large share of Australia’s rental accommodation.

Another side of the policy debate suggests otherwise.

“If they weren’t buying these established properties to rent out … the supply of and demand for rental housing would fall by equal amounts,” economist Saul Eslake has argued. “There would be no impact on rents at all.”

Rental markets remain structurally tight

So who is right, or at least closer to the solution?

There are signs that rental conditions have improved slightly, but the market is far from balanced.

Cotality recorded a national vacancy rate of 1.9 per cent in August, up from the record-low 1.5 per cent recorded in February and the highest level since January 2025. That is a meaningful improvement, but it remains well below the pre-Covid decade average of 3.3 per cent. Vacancy rates have been below 2 per cent for most of the period since early 2022.

The national figure also masks substantial differences between markets. Sydney’s vacancy rate was 2.2 per cent, while Adelaide’s was just 1.3 per cent. Other markets, including Brisbane, Perth, Hobart and Darwin, remain particularly constrained.

Rents continue to rise despite the modest increase in available properties. National rents increased 0.4 per cent in August and were 5.7 per cent higher than a year earlier, an increase of $38 a week. Over five years, rents have risen by 39 per cent, adding around $200 a week to the cost of renting compared with 2021.

Perth has experienced an even sharper increase, with rents up 56 per cent over five years, equivalent to an additional $283 a week.

The Rental Affordability Index provides a slightly less severe picture, with the median Australian family now spending 23.9 per cent of its income on rent. That measure improved modestly in New South Wales, Queensland and the ACT, but deteriorated in several other jurisdictions. In the Northern Territory, rental affordability worsened by three percentage points to 28.8 per cent of median family income.

The ACT remains the most affordable market on this measure, at 18.5 per cent.

REIA president Jacob Caine said the national result suggested rental affordability had “remained relatively stable”, but the state-by-state figures showed that stability was fragile and uneven.

The figures suggest rental stress is not being driven by one factor alone. Interest rates, construction costs, household formation, population growth and investor activity are all important variable but the common thread is a shortage of suitable rental homes.

Investors are already responding to the numbers

The investment case has become more complicated.

National gross rental yields reached 3.79 per cent in August, their highest level since September 2019. Smaller capitals offer considerably stronger returns, with Darwin at around 6.3 per cent and Hobart at 4.4 per cent. In the larger capitals, however, gross yields remain below the level required to produce neutral cash flow for many leveraged investors.

The rise in yields is not necessarily a sign that property has suddenly become a high-income investment. It partly reflects rising rents and, in some markets, softer prices. Investors still need to account for interest, maintenance, insurance, rates, land tax, management fees and periods without a tenant.

Cotality’s Tim Lawless has warned that tax changes may encourage investors to focus on higher-yielding properties. But yields would need to rise substantially to offset the combined effect of elevated borrowing costs and reduced tax benefits.

“Yields need to rise significantly while interest rates remain elevated,” Lawless said, while also noting that rental unaffordability may constrain how far rents can continue to increase.

That creates a difficult adjustment process.

Research from Ray White’s Nerida Conisbee suggests that the minimum gross yield required to offset the removal of negative gearing benefits could be around 5.15 per cent, based on an 80 per cent loan-to-value ratio, an investor interest rate of approximately 6.5 per cent, operating costs equal to 20 per cent of rent and a top marginal tax rate.

By comparison, the combined capital-city gross yield in July was estimated at 3.95 per cent. Houses produced an average yield of 3.37 per cent, while units produced 4.76 per cent.

The gap is substantial. If prices remain unchanged, rents would need to rise by about 30 per cent to reach the 5.15 per cent hurdle. Alternatively, if rents rose by 10 per cent, prices would need to fall by roughly 16 per cent. A 20 per cent increase in rents would still require an approximate 8 per cent price reduction.

Those figures are not forecasts. They illustrate the scale of the adjustment required if investors are to remain active under the new rules.

In some markets, the numbers are already more favourable. Darwin’s gross yield was estimated at 6.44 per cent, above the minimum hurdle. Canberra was also closer to the required level, while Melbourne’s stronger unit yields make it more competitive than Sydney or Brisbane.

But in Sydney and Brisbane, prices would need to fall by approximately 28 per cent and 32 per cent respectively to reach a 5.15 per cent yield if rents did not change.

The eventual outcome is likely to involve both sides of the equation: slower investor demand moderating prices, while reduced rental supply places upward pressure on rents.

Investors are part of the rental pipeline

There is evidence that investor activity has been helping to improve rental availability.

Data from realestate.com.au shows the number of available rentals increased across all capital city and regional markets in July compared with three months earlier, however, supply remains below the balanced range of 2.5 per cent to 3.5 per cent vacancy.

Anne Flaherty of realestate.com.au said the improvement in choice was encouraging, but the market remained “well below balanced conditions”. Hobart, Darwin, Brisbane and Perth remain among the tightest markets, while Canberra, Melbourne and Sydney offer renters comparatively more choice.

At the same time, investor lending has been unusually strong. Investor loan commitments over the 12 months to June 2026 reached their highest level since the Australian Bureau of Statistics began reporting the series in 2019. That surge is likely one reason vacancy rates have begun to recover.

If the tax changes reverse that trend, the impact on rental supply may be delayed but significant.

Ms Conisbee said the proposed reforms were designed to make residential property investment less attractive by removing negative gearing on established properties. But she also warned that investment would only become attractive again through some combination of higher rents, lower prices or both.

Investor loan commitments had already fallen 8.6 per cent in the June quarter, while the value of investor lending declined 10.2 per cent. The full effect of the Budget changes has not yet emerged, given they were only announced in May.

Fewer investors buying established properties means fewer properties entering the rental pool. Some existing landlords may sell, reducing supply further. Others may increase rents, where market conditions allow, to compensate for higher after-tax costs.

The Federal Government’s intention is to encourage investment in new builds. That is sensible in principle. New construction is the only way to expand the housing stock rather than simply redistribute existing dwellings between owner-occupiers and renters.

But new housing is slow to deliver.

The REINSW Vacancy Rate Survey results for August 2026, released Wednesday (9 September) show some minor improvements in rental availability across New South Wales, but vacancies remain below the level generally associated with a balanced rental market, highlighting the ongoing shortage of rental accommodation.

“The rental crisis is far from over and these modest increases should not distract from the broader issue facing the rental market,” REINSW’s CEO, Tim McKibbin, said.

“We need a policy environment that supports investment in the residential rental market and make it viable for property owners to provide homes for rent.

“Ultimately, increasing the supply of rental housing must remain a priority. Without a significant and sustained increase in supply, tenants will continue to face limited choices and affordability pressures, while property owners will continue to operate in a challenging and uncertain rental market.”

Mr Douglas has stressed that the process from acquisition and planning to construction and completion can take years.

“It could take seven to 15 years sometimes to go from concept, acquisition, builds and then delivery,” he said.

“It doesn’t matter what we build, we’re never keeping pace with that demand.”

A policy that discourages established-property investment today cannot assume new rental homes will appear quickly enough to replace it.

The supply question cannot be postponed

The central concern raised by Mr Douglas is that Australia cannot tax or regulate its way out of a supply shortage.

If policymakers want more affordable housing, the focus needs to remain on increasing the number of dwellings, improving construction feasibility and making it easier to deliver rental housing at scale, he said. That includes private landlords, institutional investors, build-to-rent providers and community housing organisations.

The rental market does not distinguish between the political appeal of a tax policy and the practical need for a place to live.

For investors, the old strategy of relying on tax deductions and long-term capital growth is becoming less straightforward. Yield, cash flow, location, tenant demand and the cost of holding the asset will now determine their strategy and viability.

For renters, however, the consequences are broader. If private investors retreat before new supply arrives, the adjustment may be felt through fewer available properties, higher rents and less choice.

Improved housing affordability is a positive for those looking to get on the property ladder but weakened rental supply on which millions of households depend, and higher rents, only add to their challenge of clearing that first rung of the ladder.