Can you afford to maintain your investment property if rent falls?
The Reserve Bank of Australia (RBA) has indicated it is unlikely that there will be an interest rate cut in the foreseeable future. Simultaneous to this, cuts to international students are being felt in Victoria and NSW. This is leading to rising vacancies across the board as the market begins to balance out. Investors are now facing two different risks to their cashflow. Where vacancy rates are above 3.00%, the market is in excess, and tenants have more negotiating power and rents fall. Below is the list of suburbs where vacancies are rising and rents are about to begin readjusting lower. Beware the substitution effect (if you own in a suburb adjacent to these then your rent is also at risk as tenants shift to cheaper for “the same”.
The top 25 locations where vacancies are above 3.00% are as follows:
| Location | Vacancy Rate |
|---|---|
| Seabrook, VIC 3028 | 6.45% |
| Williams Landing, VIC 3027 | 5.28% |
| Burnside Heights, VIC 3023 | 4.75% |
| Malvern East, VIC 3145 | 4.13% |
| Templestowe Lower, VIC 3107 | 4.05% |
| Strathmore, VIC 3041 | 4.04% |
| Box Hill, VIC 3128 | 4.00% |
| Burwood, VIC 3125 | 3.95% |
| Laverton, VIC 3028 | 3.88% |
| Balwyn North, VIC 3104 | 3.73% |
| Niddrie, VIC 3042 | 3.70% |
| Taylors Lakes, VIC 3038 | 3.67% |
| Glen Waverley, VIC 3150 | 3.65% |
| Malvern, VIC 3144 | 3.61% |
| Hadfield, VIC 3046 | 3.61% |
| Hawthorn East, VIC 3123 | 3.59% |
| Maribyrnong, VIC 3032 | 3.49% |
| Avondale Heights, VIC 3034 | 3.44% |
| Templestowe, VIC 3106 | 3.35% |
| Bentleigh East, VIC 3165 | 3.30% |
| Clayton, VIC 3168 | 3.29% |
| Prahran, VIC 3181 | 3.26% |
How much will rent fall?
Rents in the areas above are likely to fall by around 5% based on previous shifts in vacancies.
The Changing Dynamics of the Rental Market
As Australia navigates through the evolving landscape of the rental market in 2025, several factors contribute to the increasing vacancy rates and falling rents:
- Reduced International Student Numbers: One of the most significant contributors to the current rental market imbalance is the reduction in international student numbers. With fewer international students enrolling in Australian universities, particularly in Victoria and New South Wales, the demand for rental properties has decreased sharply. These students traditionally rented apartments and houses close to their universities, driving a substantial portion of the rental demand in key urban areas.
- Interest Rate Policies: The Reserve Bank of Australia’s indication that interest rate cuts are unlikely in the foreseeable future adds another layer of complexity. Property investors who rely on rental income to cover mortgage repayments find themselves in a challenging situation. As rental yields decrease, the financial viability of holding investment properties becomes a pressing concern.
- Completion of New Builds: The recent completion of new housing developments has introduced a significant number of new properties into the market. While this can be seen as a positive step towards addressing housing shortages, it also means that there is more competition among property owners to secure tenants. This increased supply exerts downward pressure on rental prices as landlords vie for the limited pool of renters.
- Market Equilibrium and Tenant Negotiation Power: Vacancy rates above 3.00% indicate a market in excess, where the supply of rental properties surpasses demand. In such a scenario, tenants gain greater negotiation power, enabling them to secure lower rents and more favorable lease terms. This shift in power dynamics further accelerates the decline in rental prices.
Implications for Property Investors
Property investors must carefully consider their financial resilience in light of these changing market conditions. The combination of reduced rental demand, unchanged interest rates, and increased housing supply presents a multifaceted challenge. Investors need to evaluate whether their current rental income can sustain their investment properties or if alternative strategies, such as selling or repurposing properties, are necessary.
Conclusion
The rental market in 2025 is undergoing significant changes driven by a confluence of factors including reduced international student numbers, stable interest rates, and an influx of new housing supply. As vacancy rates rise and rents fall, property investors face the dual challenge of maintaining cash flow and navigating a more competitive rental landscape. Adapting to these market shifts and making informed decisions will be crucial for investors to sustain their portfolios in this evolving environment.
