Please fill out the details below to receive information on Blue Wealth Events
"*" indicates required fields
Why the 3% Balanced Rental Market Benchmark Doesn’t Tell the Whole Story.
Revisiting the “balanced market” rule
Recently, API Magazine published an article asking why Australia hasn’t had a “balanced rental market” in more than two decades. It’s a timely question, and worth unpacking. The article makes several key points:
- A balanced rental market is commonly defined as a vacancy rate of around three per cent.
- Australia hasn’t reached that level for close to twenty years.
- Vacancy rates today remain well below the benchmark, highlighting a persistent undersupply.
- Contributing factors include population growth, strong migration, weak dwelling construction, and tax and regulatory settings that discourage rental investment.
- The outcome is a market characterised by record-low vacancies, sustained rent pressures, and worsening affordability for tenants.
These are all important observations. But while the article highlights the drivers, it misses a key point: the 3% benchmark itself and what it actually means in today’s conditions.
A rule built for another time
The 3% benchmark wasn’t invented recently. It was originally created by BIS Shrapnel (before it became BIS Oxford Economics) as a rule of thumb for what balance looks like under relatively normal market conditions. The issue today is that our markets are far from normal. Structural supply shortages, shifts in migration, changing household formation, and stretched affordability have made the dynamics of rental markets far more complex than a single vacancy figure can capture.
Vacancy rates versus rent growth
National vacancy rates remain extremely low at around 1.3%. On paper, this suggests a severe undersupply. Yet rent growth has slowed sharply. National median rents grew only 3% in FY2025 – a far cry from the double-digit gains of recent years. In Sydney, Brisbane and Adelaide, rents are still climbing, but far more modestly than before. Melbourne, despite recording the highest vacancy rate among capitals at 1.8%, also saw growth in rents moderate. Perth, which had been the strongest performer in earlier years, recorded one of the weakest rental growth outcomes in 2025, despite its vacancy rate being below 1%.
Why? Because affordability has hit a ceiling. As of June 2025, around 26% of average full-time weekly earnings is needed to cover the median rent nationally. In Sydney and Adelaide, the share is closer to 28–29%. That may not sound like much more, but historically, households have spent closer to 20–22%. In other words, we’re already at record stress levels. The oft-quoted figure of one-third of income (33%) going towards rent is sometimes cited, but the latest numbers show we’re not quite there yet – although some sub-markets, particularly Sydney and the Gold Coast, are pushing uncomfortably close.
Why the 3% rule falls short
This illustrates the problem with relying on the 3% “balanced market” metric as a universal truth. It assumes that when vacancy drops, rents will keep rising in a predictable fashion. But markets don’t behave mechanically. Renters are not just statistics – they are households with finite incomes. Once renters hit the wall, further undersupply doesn’t necessarily push rents higher – it just creates more crowding, more sharing, and more social strain. We’re already seeing this in the data: larger households forming, young adults delaying independence, and spare rooms being rented out to make ends meet. These are coping strategies rather than signs of balance.
Oxford Economics forecasts that national rent growth will average only about 3% per year through to 2028. That’s broadly in line with wage growth, suggesting that the runaway phase of rental inflation is over. Importantly, this is not because rental supply has suddenly caught up – it hasn’t. The undersupply remains deeply entrenched and will take years of higher construction to address. Instead, the stabilisation in rents is being driven by affordability constraints. Tenants simply cannot stretch any further, and the market is responding.
What it means for investors and policymakers
This distinction matters for investors and policymakers alike. For investors, it means that while gross rental yields may remain stable or edge higher, the days of double-digit rent increases are behind us for now. Future returns will be more closely tied to wage growth, interest rates, and capital gains. For policymakers, it means that supply-side measures are still urgently needed. Incentives for new construction, streamlined planning, and targeted migration policies could all play a role in easing the strain. But these will take time to flow through, which is why affordability pressure will remain elevated for several years.
Another critical point is the unevenness across markets. Sydney is at the sharp end of rental stress, with nearly 29% of household income required for median rents. Adelaide has also reached uncomfortable levels, despite being a traditionally more affordable market. Brisbane is experiencing strong population growth, which is keeping demand high, but rental growth is now slowing as affordability binds. Perth, once the leader in rental price growth, has already cooled as tenants run out of room to pay more. Even Hobart, long considered a relatively cheap alternative, has climbed back to record-low vacancy levels and saw some of the strongest rental growth in 2025.
Rethinking balance in 2025
Taken together, the data paints a picture of a rental market that remains extremely tight in terms of supply, but increasingly constrained by demand-side limits. This is why the industry needs to move beyond the simplistic 3% benchmark. Balance in 2025 cannot just be defined by vacancy. A more realistic definition must also consider the proportion of household income being spent on rent, the rate of household formation, and the capacity for tenants to absorb further increases.
So yes, the API article is correct to say it’s been a long time since the market has been “balanced” by the old definition. But perhaps that definition itself needs to be re-examined. In 2025, balance isn’t just about vacancy rates – it’s about what households can actually afford to pay. The challenge for investors, policymakers, and renters alike is that until supply meaningfully increases or wages rise faster, we’ll be stuck in this uncomfortable middle ground: technically undersupplied, but practically constrained.
See more like this
There are no results to display.
Please try a different keyword or reset the filters to see everything.
