Rental squeeze reshapes investor equation as unit markets tighten

Australia’s rental market is no longer just tight, it is reshaping the fundamental economics of property investment.

Inner-city unit markets, long considered the underperformers of the housing sector, are now leading a shift in the rent-versus-buy equation, as surging rents, limited supply and a gradual return of population growth combine to change investor behaviour.

According to CBRE’s latest apartment outlook, vacancy rates across major capital city unit markets remain near historic lows, with demand continuing to outstrip available supply despite a modest lift in new completions. The result is sustained upward pressure on rents, particularly in well-located inner-city precincts.

This is a marked reversal from the pandemic period, when CBD apartment markets struggled under the weight of reduced migration and weak rental demand.

Now, those same markets are experiencing some of the strongest rental growth in the country.

The shift is not occurring in isolation.

Cotality’s Home Value Index points to a broader rebalancing across the housing market, with unit values and rents gaining momentum relative to detached housing. While houses have led capital growth over the past decade, affordability constraints are pushing both renters and buyers toward higher-density options.

Rental yields ascending as investor priority

That dynamic is becoming increasingly important for investors.

Higher rental yields in the unit sector, driven by rising rents and comparatively lower purchase prices, are helping to offset the impact of elevated interest rates.

In some inner-city markets, rental returns are now approaching levels not seen in years, improving the cash flow profile of investment properties.

Vacancy rates remain compressed across most capital cities, with limited new supply coming online in the near term. Construction constraints, including labour shortages and elevated building costs, continue to restrict the pace of new development, particularly in the apartment sector.

This supply bottleneck is a critical part of the story.

While population growth fuelled by migration has rebounded strongly, the pipeline of new housing has struggled to keep pace. The result is a structural imbalance that is likely to underpin rental markets over the medium term.

The monthly trend in national rental growth has held around 0.7 per cent over the past three months according to Cotality, taking the quarterly change to 2.1 per cent, the largest three month change in rents since May 2024.

The reacceleration in rental growth is occurring at a time when rental affordability measures are already stretched to record levels. Assuming a household on the median income is renting at the median rate, they would be dedicating around a third of their pre-tax income on rental repayments.

To rent or buy

For tenants, the consequences are clear.

Rents have risen sharply across most markets, placing increasing pressure on household budgets and contributing to broader cost-of-living challenges.

In some cases, the cost of renting is now approaching or even exceeding the cost of servicing a mortgage, particularly for smaller dwellings in inner-city locations.

The situation is worsening as supply fails to meet housing demand.

CBRE estimate Sydney’s apartment delivery will average 12,300 pa over 2026-30. Demand for housing stock (apartments and communities) is likely to average 27,000 pa over the next five years, with the city-wide vacancy falling from 2.0 to 1.1 per cent.

This has prompted renewed debate about the so-called “rent versus buy” equation.

Historically, renting has offered a more affordable entry point into the housing market. However, as rents climb and borrowing conditions gradually stabilise, that gap is narrowing, particularly for first-home buyers with stable incomes and access to deposits.

For investors, the implications are more nuanced.

On one hand, strong rental growth and low vacancy rates are supporting returns and reinforcing the appeal of residential property as an income-generating asset. On the other, higher interest rates and ongoing policy uncertainty, including potential tax changes, are adding complexity to investment decisions.

This is where the market is beginning to diverge.

Some investors are being drawn back into the unit sector, attracted by improving yields and lower entry costs compared to houses. Others remain cautious, weighing the risks associated with interest rates, regulatory settings and future capital growth prospects.

The broader picture suggests a market in transition.

The period of ultra-low interest rates that fuelled rapid price growth is over, replaced by a more balanced environment where income, rather than capital gains alone, is playing a larger role in investment decisions. The outer suburban property rush is also showing signs of abating.

With rents rising and supply constrained, the income side of the equation has become more attractive, especially in segments of the market that had previously underperformed.

Affordability challenges remain

Affordability pressures continue to weigh on tenants, and will for as long the supply pipeline remains uncertain. Although there are signs of increased development activity in some areas, it will take time for new projects to translate into completed dwellings and meaningful relief for renters.

In the meantime, the rental market is expected to remain tight.

CBRE’s outlook suggests that while rental growth may moderate from recent peaks, conditions will remain supportive for landlords, particularly in inner-city and well-connected locations.

Cotality’s data reinforces this view, highlighting the ongoing imbalance between demand and supply as a key driver of both rental and price dynamics.

For policymakers, the situation presents a familiar challenge.

Efforts to improve affordability must be balanced against the need to encourage investment and boost housing supply. It is a task made more complex by rising construction costs and planning constraints.

For investors, the message is clearer.

The rental market is no longer just a supporting factor in property investment, it is increasingly central to the equation.

In a landscape defined by higher interest rates and constrained supply, income resilience is becoming just as important as capital growth. That is particularly the case in cities like Sydney and Melbourne, where property prices experienced small declines last month.

In a further sign of some heating coming out of the national property market, the preliminary auction clearance rate fell sharply this weekend, reaching 55.5 per cent.

According to Cotality data released Tuesday (7 April), this marked the lowest preliminary clearance rate since July 2022, and the first time the early clearance rate had fallen below the 60 per cent mark since December 2022.