Rental Outlook Remains Resilient as Investor Market Adjusts to Budget Changes

A sustained increase in net international migration, combined with the aftermath of the pandemic, pushed rental growth well ahead of incomes. During the peak two-year period between late 2022 and early 2024, annual rental growth across the capital cities was upwards of 10%. Individuals were spending, on average, 5% more of their income on rent than before. That share now sits at around 30%, according to Oxford Economics, commonly treated as an affordability threshold. 

For the approximately 3 million renting households nationally (according to the ABS), rental growth has eased from those abnormal highs but remains elevated. The first eight months of 2026 have seen rental growth accelerate again, with Cotality reporting annual growth of 6.4% in the year to August across Australia, up from 4.6% in the same period in 2025.

So where next for rents? With tax reforms from the Federal Budget now legislated, a line in the sand has been drawn for investors. Opportunities for positive rental income look slimmer in the current interest rate environment. You can read about the details of the changes and our thoughts on the impact on the market here.

Official mortgage data has confirmed that the total value of new investor loans for home purchase dropped by 10% between Q1 and Q2 2026, capturing some of the initial fallout of the Budget announcements. The decline was more severe for existing properties, down by 13%, reflecting the removal of negative gearing eligibility for these assets. Lending toward the construction and purchase of new dwellings was up 6% and 7% respectively, suggesting some investor activity will instead move into the new build market, as policy intended.

Savills Research has analysed rental stock, affordability, income growth, net overseas migration, household growth and future housing supply to assess what comes next for the three largest rental markets: Sydney, Melbourne and Brisbane.

HEADLINE FORECAST: RENTAL GROWTH TO REMAIN ABOVE TREND ACROSS THE THREE LARGEST CAPITALS

With no immediate relief in housing supply, vacancy rates below 2% and below-average rental stock on the market, rental pressure is expected to continue in the short term. We expect growth to peak between 5.5% to 6.5% over the next six to twelve months across the three capital cities.

Longer term, as housing supply increases and net migration normalises, we expect rental growth to move gradually back towards income growth. However, weaker private investor activity in established markets is likely to reduce rental stock, keeping longer term rental growth above the historic average of 2.0% pa. From 2029 to 2031, we expect rental growth to average at or just below 4% per year across the three capital cities.

SYDNEY: ELEVATED RENTAL GROWTH BEFORE AFFORDABILITY BITES AND DEMAND PRESSURES EASE

Sydney remains the country’s most expensive capital city rental market, with median weekly rents estimated at $885 for houses and $780 for units, according to Cotality. Individuals also spend the greatest share of income on rent, at 35%, according to Oxford Economics, highlighting the extent to which affordability is already stretched.

Despite these elevated rents, demand remains strong, although it is coming down from recent highs. More than a quarter of Australia’s population growth from overseas migration settles in Sydney, and the city’s large student population also supports rental demand.

At the same time, home ownership is becoming harder because of increasing deposit requirements and mortgage costs. KPMG estimates that Sydney home ownership has fallen to its lowest level since the 1950s, dropping below 60%, compared with the NSW average of 64%. With prices softening more recently, weaker sales market conditions are expected to weigh on transaction activity, with some prospective first home buyers delaying purchases and remaining in the rental market for longer.

Sydney is also expected to be one of the markets most exposed to the removal of negative gearing for existing dwellings. As investors increasingly focus on higher-yielding or new-build opportunities elsewhere, the established rental market may experience lower levels of investor participation over time. While this could constrain rental stock and support rents, the effect is likely to emerge gradually as investment and disposal decisions occur over several years.

The key constraint is affordability. Other global cities demonstrate how affordability can begin to limit rental growth. London renters spend, on average, 39% of income on rent, according to HomeLet, compared with around 35% in Sydney. While the two markets are not directly comparable, the experience highlights how affordability pressures can act as a brake on rental growth over time. After strong increases, London rental growth has eased to around 2%, according to Zoopla, despite demand still running ahead of supply. In Sydney, this may see demand increasingly shift towards more affordable suburbs, housing types and shared living arrangements.

With this context in mind, the near-term fundamentals in Sydney remain supportive of rental growth. Next year, we expect vacancy levels to remain tight, with rental growth likely strongest in the first quarter during the busy summer leasing period. With rate cuts not expected until at least 2027, some would-be first home buyers will stay renting for longer as they remain constrained by borrowing capacity. In the second half of the year, rents are likely to decelerate as tenant affordability acts as a brake in the most expensive markets, while outer ring suburbs outperform as renters seek less expensive living arrangements. Overall, rental growth is expected to remain well above the long-run average of 2.1%, ending 2027 at 5.0%.

From 2028, demand pressures are expected to ease as fewer arrivals from overseas and committed new supply entering the market reduce the housing shortfall across the city. Dwelling stock growth is expected to outpace household growth in Sydney, while net overseas migration is expected to fall by almost 25% from 2026 levels.

As vacancy rates loosen and affordability pressures continue to mount, rental growth should remain above its long-run average but gradually ease towards income growth, averaging around 3.5% per annum from 2029 onwards.

MELBOURNE: MORE ROOM FOR RENTS TO RUN

Melbourne is comparatively more affordable than the other major capitals. Median weekly rents are around $670 for houses and $630 for units, around 23% lower than Sydney. Rental growth has also been less extreme, with rents up around 30% since 2020 compared with around 50% in some other markets. As a result, individuals are spending less than the Australian average on rent, at 29% of their income.

Demand fundamentals remain strong. Melbourne receives 27% of Australia’s net overseas migration and has recorded the fastest household growth of the capital cities over the past five years. Its deep labour market, large student population and relative affordability could also attract a greater share of students and workers, supporting rental demand over the forecast period.

Higher dwelling completions over the past decade have helped keep Melbourne rental growth below Sydney and Brisbane, but this relative underperformance now leaves Melbourne with the greatest catch-up potential. With fewer recent apartment commencements, household growth is expected to outpace dwelling stock growth in the short to medium term, adding pressure to an already tight rental market.

Investor and landlord dynamics are also likely to support rents. Landlords may seek to pass on higher land tax and mortgage costs, while constrained new apartment delivery limits the near-term expansion of rental stock. These pressures are likely to be felt most strongly before the bulk of the five-year development pipeline is completed from 2028 onwards.

In the near term, these fundamentals are expected to push rental growth higher. Melbourne rental growth is forecast to accelerate to 6.0% in 2027 and remain elevated in 2028, supported by strong population growth, tight vacancy, stronger-than-average wage growth and less acute affordability constraints than in Sydney and Brisbane.

Longer term, rental growth is expected to moderate as more homes are completed and lower interest rates support first home buyer activity. Melbourne has a smaller gap between rents and mortgage repayments than Sydney and Brisbane, giving households a stronger incentive to buy, while stronger yields could also draw investors back into some parts of the market. As these factors gradually ease rental pressure, we expect growth to slow from 2030 and move closer to income growth, at around 3.5% per year.

BRISBANE: STRONGEST OUTLOOK AS DEMAND REMAINS BROAD-BASED

Brisbane remains a tight and increasingly expensive rental market. Median weekly rents are around $770 for houses and $740 for units, equivalent to an average of 30% of income for individuals. The city has also experienced one of Australia’s strongest rental growth cycles, ahead of Sydney and Melbourne, driven by exceptional population growth and persistent housing undersupply.

Demand remains broad-based. Interstate migration has been a major driver, with households relocating from Sydney and Melbourne in search of more affordable housing and lifestyle advantages, while strong overseas migration has added further pressure. Household growth is expected to be strongest in Brisbane over the next five years, with interstate migration forecast to peak between 2028 and 2029.

Additional workers supporting the Olympics and associated infrastructure projects are also expected to increase demand for rental housing. At the same time, worsening apartment affordability for purchasers and a large gap between rents and mortgage repayments are likely to keep renters in the market for longer.

Supply constraints are expected to keep pressure on rents. Queensland’s housing deficit is expected to decline, improving the number of available properties, but construction and labour shortages remain a risk. In the lead-up to the Olympics, major infrastructure projects could absorb capacity from residential development, delaying some sites and creating upside risk to our forecast.

Softer individual investor appetite may also limit the expansion of rental stock. Investor demand could soften as capital value growth moderates and current yields remain well below the cost of debt, at 3.9%. If new rental supply remains constrained while demand continues to grow, rental markets are likely to stay tight for longer.

In the near term, these factors support the strongest rental forecast of the three capital cities. Rental growth for 2026 is expected to end the year strongly, at around 6.5%, before remaining elevated at 6.0% in 2027 and 5.0% in 2028.

Longer term, rental growth is expected to moderate as supply conditions gradually improve. However, Brisbane’s strong demographic demand means rents are still expected to grow ahead of incomes until the end of 2030. Over the five years to 2031, Brisbane is forecast to record the strongest cumulative rental growth of the three cities, at 25.2%.

RENTAL FORECASTS 2027–2031

Source: Savills Research using Oxford Economics and Macrobond (Cotality)

Note: These forecasts apply in the mainstream market only and represent achieved rental growth across the market. Asking rents, prime rents and rents for purpose-built stock may not behave in the same way.

While rental growth is expected to moderate from the extraordinary levels seen in recent years, the forecasts suggest rental markets will remain undersupplied across Australia's largest capital cities for some time. Vacancy rates are expected to remain relatively tight, rental growth is forecast to outpace long-run averages, and affordability pressures are likely to continue delaying home ownership for many households. These conditions have broader implications for Australia's emerging Living sectors.

IMPLICATIONS FOR THE LIVING SECTORS

Whilst the forecasts are not specific to Living sector assets, the trends identified continue to underpin the strength of the investment case for professionally managed rental product, including Build to Rent (BTR), Co-Living and Purpose-Built-Student Accommodation (PBSA).

The forecasts point to a rental market that remains underpinned by strong fundamentals. Even as growth moderates from recent highs, rents are expected to remain ahead of income growth in the near term, supported by low vacancy, constrained supply, strong migration and stretched affordability in the ownership market. 

With operational and under-construction BTR, Co-Living and PBSA units accounting for only 4% of rented households across Australia, the professionally managed Living sector remains at an early stage of maturity, with considerable scope for further growth. This presents an opportunity to expand the supply of flexible, well-located rental options at a variety of price points for households, students, and young workers, particularly in locations experiencing strong demand for rental housing.