Where property investors could raise rents today - and where they shouldn't

With national rental vacancy rates still scraping along at or near historic lows, many landlords may be tempted to continue increasing rents, but is that the most strategic play?

Fresh data from SQM Research shows the national residential vacancy rate held steady at 1.1 per cent in May, with major capitals like Brisbane (0.8 per cent), Perth (0.6 per cent) and Adelaide (0.6 per cent) still experiencing critical shortages of available rentals.

While conditions remain tight overall, some signs of softening have emerged in Sydney and Melbourne, where vacancy rates have inched slightly higher to 1.3 per cent and 1.4 per cent respectively.

Ditto in Canberra, where vacancy rates are at 1.5 per cent, down 0.3 per cent year-on-year and 0.1 per cent month-on-month, pointing to a gradual decline in rental vacancies, but a softer market than the likes of Brisbane and Adelaide.

Despite the ultra-low national figures, rental growth is beginning to slow.

Growing pains

According to Cameron Kusher, property market analyst and economic researcher, this turning point isn't just about available supply; it's also about stretched tenant budgets.

"The rental market is still very tight, which reflects strong demand and low levels of new rental supply," he told view.com.au.

"We've seen a bit of a loosening of conditions in Sydney, Melbourne and Canberra, but we're still seeing very strong population growth and migration, and a lot of that is putting more pressure on the rental market.

"I think we're at a point where people just don't have the capacity to keep paying higher and higher rents, so that's limiting how much landlords can actually lift rents by."

So despite national rental vacancy rates remaining very low on an historic basis, Mr Kusher recommends landlords not jumping too quickly to hike rents.

" Landlords will have to be cautious about how much they increase rents because after several years of strong rental growth, renter capacity to pay higher prices for rentals is stretched," he said in his Oz Property Insights market recap.

Tight market, tighter wallets

Mr Kusher explained that while some suburbs still offer scope for landlords to lift rents, it's no longer a one-size-fits-all strategy.

In many parts of the country, particularly in inner-city precincts, rental price fatigue has set in.

"At the moment, you've probably got the best capacity to put up rents in the areas of each of the cities where renting costs are a bit lower," he said.

"We've seen the price at which people are paying for rents in the inner-city areas are so high that a lot of people are moving to outer areas of the capital cities. So that's probably where you've got more capacity to lift rents."

However, Mr Kusher warned that even in these outer suburban markets, landlords should proceed with caution.

"People are moving out of the inner-city areas to those markets, and if they end up paying more, obviously they're going to be less inclined to do that."

New vs old: Tenants are choosing affordability

With the cost of living still biting and discretionary spending a tight squeeze, renters are prioritising affordability, even if that means going for an older property and/or further out.

The price needs to be right, especially for newer builds.

"If you have a new apartment or house and it's at a significant premium in terms of rent to an existing one, you're probably going to find that more difficult to rent out," Mr Kusher said.

"People are really price sensitive.

"If something's a few years older and, as a result, cheaper, they're probably going to choose the older, cheaper property."

What this means for investors

Louis Christopher, Managing Director of SQM Research, said that rents will likely remain at these current elevated levels until population growth steadies and new builds increase.

"We are likely to have ongoing elevated rents for a long period of time, until we have equilibrium between tenancy demand and rental supply.

"That's not likely to happen until such time as we have a slow down in population rate and a meaningful increase in new dwelling completions."

But while the rental market may still favour landlords, the era of unrestrained rent increases seems to be coming to an end.

"Rental vacancy rates are still extremely low in places like Brisbane, Adelaide and Perth, but even in those markets, we're not seeing rents rise as quickly," said Mr Kusher.

For property investors, particularly in Canberra and other high-income regional cities, these market dynamics similarly signal a need for strategic pricing rather than aggressive rent hikes.

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