What mix of rent rises and price falls would make property investment stack up again?

A key aim of this year’s Federal Budget was to make investing in residential property less attractive by no longer allowing negative gearing on established properties. Investor activity fell immediately. 

The number of new investor loan commitments dropped 8.6 per cent in the June quarter, while the value of lending fell 10.2 per cent. Importantly, the Budget was only announced on 12 May, part-way through the quarter, so the full impact is unlikely to have shown up yet. 

The question is what would make property financially attractive to investors again?

This can happen through higher rents, lower prices, or most likely, a combination of both, something which is already occurring.

Cotality's July 2026 data puts the gross rental yield across the combined capitals at 3.95 per cent. This varies significantly by property type, with houses yielding just 3.37 per cent, compared with 4.76 per cent for units. There is also a wide variation between cities. 

Brisbane has the lowest dwelling yield at 3.51 per cent, followed by Sydney at 3.72 per cent and Adelaide at 3.80 per cent. At the other end of the spectrum, Darwin's yield is 6.44 per cent, while Canberra and Melbourne are at 4.80 per cent and 4.58 per cent respectively. 

This starting point is important as the lower the current yield, the greater the adjustment in rents or property prices that would be needed to make investment sufficiently attractive without negative gearing.

What is the right yield?

An appropriate yield post Budget is highly subjective given it depends on personal circumstances. However for the sake of this analysis, we estimate a minimum hurdle of around 5.15 per cent would be required to offset the removal of negative gearing. This assumes an 80 per cent loan-to-value ratio, an investor mortgage rate of around 6.5 per cent, operating costs equal to 20 per cent of rent and an investor on the top marginal tax rate. 

At a 3.95 per cent yield, negative gearing currently offsets part of the annual cash loss. A yield of around 5.15 per cent replaces that immediate tax benefit and leaves the investor in roughly the same annual cash position.

A second threshold is 6.5 per cent. At this yield, after allowing for operating costs, rental income is sufficient to cover the interest cost on an 80 per cent loan. The property is cash-flow neutral before tax; above 6.5 per cent it becomes cash-flow positive.

Getting from 3.95 per cent to either of these levels does not require rents to do all the work, nor does it require a very large fall in property prices. Rental yield is simply rent relative to the value of the property. Higher rents lift the yield. Lower property values also lift the yield. In practice, the adjustment can occur through any combination of the two.

The chart shows the scale of the rental adjustment that could be required. If property prices did not move, rents would need to rise by around 30 per cent to lift the current 3.95 per cent yield to our 5.15 per cent minimum hurdle. To reach the 6.5 per cent self-funding threshold, rents would need to rise by around 65 per cent. 

Rents won't do all the work

In reality, rents are unlikely to do all of the work. If rents rose 10 per cent, the price fall required to reach the minimum hurdle would drop to around 16 per cent. A 20 per cent increase in rents would reduce the required price fall to around 8 per cent, while a 30 per cent rise in rents would almost remove the need for prices to fall at all. 

Reaching the 6.5 per cent threshold would still require a much larger adjustment: with rents up 20 per cent, prices would need to fall around 27 per cent, while a 40 per cent rise in rents would reduce that to around 15 per cent.

The adjustment would also look very different around Australia because starting rental yields vary considerably. Sydney currently has a dwelling yield of around 3.72 per cent, while Brisbane is even lower at 3.51 per cent. With rents unchanged, prices in those cities would need to fall around 28 per cent and 32 per cent respectively to reach the 5.15 per cent hurdle.

Melbourne is already much closer, its higher yield of 4.58 per cent partly reflecting years of weaker investor demand, with higher property taxes and tighter rental regulation contributing to softer prices and, at the same time, stronger pressure on rents. 

It would require either a rent increase of around 12 per cent or a price fall of around 11 per cent if either did all the adjustment. Canberra, at 4.80 per cent, is closer again. Darwin is the outlier. Its current dwelling yield of 6.44 per cent is already above the minimum hurdle and just below our estimated cash-flow break-even level.

The adjustment is likely to occur through both sides of the market. Slower growth in rental supply supports rents, while softer investor demand can moderate prices. 

Together, those movements lift rental yields and gradually improve the investment equation.

 The end result is unlikely to be driven by rents rising or prices falling alone, but by a combination of the two that eventually makes property investment more attractive again.