Why Rental Growth Hasn’t Slowed the Way Many Expected

After the sharp rental surge of 2022 and 2023, many analysts anticipated a cooling phase. Interest rates had risen, affordability pressures intensified, and household budgets were tightening. The prevailing expectation was that rental growth would decelerate materially.

Yet across much of Australia, rents have remained resilient and in several markets, continued rising.

This raises an important question: why hasn’t rental growth slowed the way many predicted?

Migration Has Remained Elevated

One of the strongest drivers of rental demand has been net overseas migration. While forecasts suggested moderation, migration levels have remained comparatively strong, particularly in major metropolitan areas.

When population growth outpaces housing supply, rental demand persists regardless of interest rate settings. The absorption capacity of rental markets has therefore remained under sustained pressure.

Net overseas migration into Australia surged to historically high levels following border reopening, with annual intake exceeding 500,000 at its peak in 2023. A significant portion of this demand has been concentrated in Sydney, Melbourne, and Brisbane, where rental markets were already tight. New arrivals typically enter the rental market before transitioning into ownership, which creates immediate and concentrated pressure on available rental stock.

This influx has effectively offset any demand reduction that may have been expected from higher interest rates, reinforcing the structural imbalance between supply and demand.

Housing Completions Have Lagged Demand

Even as borrowing costs increased, dwelling completions did not accelerate sufficiently to rebalance supply. Construction delays, insolvencies within the building sector, and labour constraints limited new stock.

Without meaningful supply expansion, rental markets remained structurally tight. Slower construction activity reinforced upward pricing pressure despite affordability concerns.

ABS data indicates that dwelling approvals declined materially through 2022 and 2023, reflecting both rising construction costs and reduced developer feasibility. At the same time, insolvencies within the construction sector reached elevated levels, further delaying project completions. Even projects already underway experienced extended timelines due to labour shortages and supply chain disruptions.

As a result, the pipeline of new housing has not only failed to meet current demand but has also weakened future supply expectations. This lag effect means that even if approvals recover, it will take several years before additional supply meaningfully impacts rental availability.

Vacancy Rates Remain Below Long-Term Norms

Vacancy rates act as a leading indicator for rental direction. Although modest increases have appeared in selected regions, national vacancy levels remain historically low.

Tight vacancy conditions limit tenant choice and sustain competition. As long as vacancy remains constrained, broad-based rental declines are unlikely.

National vacancy rates have hovered around 1% or below in many capital cities, compared to a long-term equilibrium closer to 2.5–3%. In practical terms, this represents a severe shortage of available rental properties. In cities like Perth and Adelaide, vacancy rates have at times fallen below 1%, indicating extremely tight conditions.

Low vacancy rates not only sustain rental growth but also reduce tenant bargaining power, allowing landlords to adjust rents upward even in the face of broader economic pressure.

Why Rental Affordability Pressures Haven’t Triggered a Decline

A key assumption behind forecasts of slowing rental growth was that affordability constraints would eventually cap price increases. While affordability has deteriorated significantly, it has not yet translated into declining rents.

Instead, tenants have adjusted their behaviour. Household sizes have increased, with more individuals sharing accommodation to distribute costs. Additionally, some renters have relocated to outer suburban or regional areas in search of affordability, maintaining overall demand levels across broader geographic markets.

There is also evidence that rental stress has increased, but not to the point of demand destruction. This suggests that affordability thresholds are being stretched rather than acting as a hard ceiling on rental growth.

Higher Interest Rates Did Not Reduce Demand

Higher interest rates were expected to reduce investor participation and dampen rental growth. Instead, rate increases affected both landlords and aspiring homeowners.

Some prospective buyers delayed purchasing due to borrowing constraints, remaining in the rental pool longer. This extended rental demand even as ownership affordability weakened.

The net effect was continued pressure on rental markets rather than relief.

Graph: Rental Growth Remains Elevated Despite Expectations of a Slowdown

This chart shows the steady rise in rental prices from 2020 to 2024, followed by a projected moderation in 2025. While growth is beginning to ease, the data suggests rental markets remain structurally tight rather than entering a significant decline.

Table: Why Rental Growth Remained Resilient

Factor	Expected Impact	Actual Outcome
Higher Interest Rates	Reduced rental demand	Delayed homeownership, sustained demand
Wage Pressure	Rental resistance	Gradual affordability strain, not collapse
Supply Pipeline	Increased availability	Construction lagged demand
Migration	Moderation expected	Elevated inflows continued
Vacancy Rates	Normalisation	Remained historically low

This divergence between expectation and outcome explains why rental growth has not slowed as anticipated.

Are We Seeing the Beginning of Moderation?

While rental growth has remained firm, early signs of moderation are emerging in some regions. Vacancy rates are edging slightly higher and rental increases are occurring at a slower pace than peak growth periods.

This suggests not a reversal, but a transition from rapid acceleration to controlled expansion.

Structural supply constraints remain unresolved, limiting the likelihood of widespread rental declines in the near term.

CoreLogic data indicates that while rental growth has slowed from peak quarterly increases, it remains positive across most capital cities. This moderation reflects a gradual rebalancing rather than a reversal. Importantly, the absence of a meaningful supply surge suggests that any easing in rental growth is likely to be incremental rather than abrupt.

Frequently Asked Questions (FAQ)

Why didn’t higher interest rates reduce rents? Higher rates delayed home purchases for many households, keeping them in the rental market longer.

Are vacancy rates rising? They have increased slightly in some areas but remain historically tight overall.

Could rents still fall? A sustained increase in supply or sharp demand contraction would be required for broad declines.

Is migration still affecting rents? Yes. Elevated population growth continues to support rental demand in major cities.

Is rental growth slowing at all? Growth appears to be moderating from peak acceleration, but not reversing nationally.

What should investors watch next? Vacancy rate trends, housing completion data, and migration policy changes will be key indicators.

Conclusion

Rental markets were widely expected to cool under the weight of rising interest rates and affordability strain. However, structural forces particularly migration levels and limited supply have maintained tight market conditions.

The anticipated slowdown has been softer than predicted because demand has remained elevated while supply has not expanded sufficiently.

While growth rates may ease, the underlying imbalance between rental demand and available housing stock suggests that meaningful downward pressure remains unlikely in the immediate term.

For investors, this reinforces the importance of monitoring supply trends and vacancy shifts rather than assuming interest rates alone dictate rental performance.

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