Households Drive Rents: Why 2025 Will See Rent Declines
The dynamics of household behaviour play a pivotal role in shaping rental markets, and this year is set to mark a turning point as rents are expected to decline. The old adage, “necessity is the mother of invention,” aptly describes the remarkable adaptability of people when faced with changing circumstances. This adaptability is why economics is often called the dismal science—just when predictions seem certain, human behaviour evolves, and the outcome shifts. Predicting human behaviour is complex, but certain patterns, such as those seen in rental markets, offer some degree of predictability. I have leaned heavily on the Reserve Bank of Australia’s research for this article. Please visit the full article on their website for a better understanding (and explanation).
The Context: A Period of Aggressive Rent Growth
Over the past three years, Australia has experienced aggressive rent increases across major metropolitan areas. Although these hikes followed the unprecedented lows of the pandemic, their sheer magnitude outpaced wage growth and households’ ability to afford them. Two significant factors drove this surge:
- A Decrease in Average Household Size: During the pandemic, average household sizes increased as people sought additional space for comfort, safety, or personal independence. This was unwound follwing the end of the pandemic,
- The Rise of the Home Office: With the advent of work-from-home (WFH) arrangements, many households opted for properties with extra rooms to accommodate home offices. This sudden shift created additional demand for larger rental properties, further straining supply.
The Turning Point: Shifting Demand and Economic Constraints
The WFH phenomenon, while transformative, is now in a phase of normalization. While remote work is expected to remain more prevalent than pre-pandemic levels, the long-term equilibrium is stabilizing, with approximately 30% of workers projected to retain some form of WFH flexibility (as opposed to 40%). As the demand for home office spaces diminishes, so does the pressure on rental markets for larger homes.
Simultaneously, renters face growing financial constraints. Wage growth has struggled to keep pace with rising housing costs, leaving many individuals and families with limited options. When earning more or switching jobs becomes unfeasible, renters often resort to a time-tested solution: sharing accommodation.
The Numbers: Evidence of Adaptation
Data from the Reserve Bank of Australia illustrates how household dynamics directly influence rental trends. Post-pandemic, the average household size in Melbourne fell from 2.75 people to 2.6, while Sydney saw a decrease from 2.65 to 2.5. This reduction in household size contributed to skyrocketing rental growth in both cities. However, as renters began adjusting by forming shared living arrangements, this growth has slowed and, in some cases, reversed.
What to Expect in 2025
The rental market’s trajectory for 2025 suggests a period of stabilization and possible decline in rents. Key factors include:
- Household Consolidation: More people are likely to share housing as a cost-saving measure, increasing the average household size.
- Market Saturation: The rapid rent increases of recent years have pushed many renters to their financial limits, reducing the market’s capacity to sustain further growth.
- Supply Adjustments: Developers and landlords are beginning to respond to shifting demand dynamics by adapting property offerings and rental pricing.
The Bigger Picture: Lessons for the Rental Market
This year’s expected decline in rents underscores a broader lesson about the interplay between economic forces and human adaptability. When housing costs rise beyond sustainable levels, households find ways to adjust—whether by sharing spaces, relocating, or downsizing. For policymakers, developers, and landlords, understanding these behavioral shifts is crucial for creating resilient and equitable housing markets.
As we move through 2025, monitoring household size trends, wage growth, and the evolution of WFH practices will be essential for anticipating future movements in the rental market. Ultimately, it is the households themselves—their choices, constraints, and adaptations—that drive rental dynamics.
