Vacancy is at a record low. So why did his September rent review come back at zero?

He is 44, owns his home on Sydney's north shore, and in 2022 bought a four-bedroom house in Sydney's west as a rental. He is a composite illustration, not a real person, built from the pattern in this quarter's rental data.

The house costs him about $1,100 a month after the rent comes in. He accepted that, because the spreadsheet said the gap would close. The spreadsheet had one line doing most of the work: rent up $40 a week, every year, for five years.

That line felt safe. Vacancy in his suburb was under 1 per cent. Twenty groups came through the last open home. Every article he read said Australia was short of rentals.

Last week his property manager sent through the September rent review. The recommended increase was zero.

The question

"Vacancy is at a record low. There are no rentals. Everyone says it is a landlord's market. So why can't I raise the rent, and what does that do to my numbers?"

The answer: tenants ran out of room before supply did

Domain's September quarter data, reported by the ABC on 8 October, shows capital city house rents unchanged at $700 a week. Unit rents rose 1.5 per cent. The national vacancy rate rose 0.1 percentage points to 1 per cent, which is still far tighter than a year ago.

House rents in Melbourne, Brisbane, Perth and Adelaide went nowhere over the three months. Sydney house rents fell $5 a week. Canberra fell $10. Only Darwin, up 5.3 per cent, and Hobart, up 1 per cent, recorded rises.

So supply is still scarce and rents stopped moving anyway. Domain's chief residential economist Nicola Powell told the ABC that tenants' ability to absorb further increases is now the dynamic limiting rental growth, and that there is "almost a disconnect" between where the vacancy rate sits and what rents are doing.

In plain words: the queue at the open home is long, and nobody in it can pay more.

Independent property economist Cameron Kusher described to the ABC what tenants are doing instead. Renting in a less ideal location. Taking a cheaper place. Share housing. Adult children staying at home longer. Each of those is a household stepping back from the top of the market. The top of the market is where his $40 a week was supposed to come from.

What his spreadsheet got wrong

He modelled rent against supply. He never modelled it against income.

A rental has two ceilings. The first is set by how many homes are available. The second is set by what the households in that catchment can pay out of their wages. For three years the first ceiling was the only one that mattered, and rents rose to meet it. The second ceiling has now arrived, and it does not care how many people turned up on Saturday.

Five years of $40 a week increases was supposed to add $200 a week to his rent by year five. On a flat rent, the $1,100 a month gap stays open, and every rate decision, insurance renewal and land tax notice widens it.

Nobody puts this in the headline: a record-low vacancy rate is a count of empty homes. It says nothing about the bank balances of the people queuing for them.

The expensive mistake

The expensive mistake now is to hold out for the rent the spreadsheet promised. Keep the asking rent high, let the house sit empty for a fortnight, wait for the tenant who can pay. Two empty weeks on a $700 a week house cost $1,400. A $5 a week cut, the size of Sydney's quarterly fall, costs $260 over a full year.

Vacancy you chose is far more expensive than rent you conceded.

What it means for you

If you are weighing an investment property, stop writing a rent growth line because the vacancy rate is tight.

Test the asking rent against what the tenants in that catchment earn. Ask what share of a local household's income the rent takes, and whether it has room left to rise. Ask which dwelling type tenants are moving toward. Domain's own numbers show unit rents rose 1.5 per cent in the quarter while houses sat flat, which is what trading down looks like in the data. Ask whether the street you are looking at is the one tenants compromise toward, or the one they compromise away from.

Those answers change which suburb you buy in and what you buy. A tight suburb full of households already at their limit is a very different asset from a tight suburb with income headroom.

The Ripehouse reframe

Two streets in the same suburb can be having completely different outcomes right now. One sits at the price point tenants are trading down into. The other sits at the price point they are trading out of. Same vacancy rate, opposite rent story.

That is why we test rent assumptions against the local tenant pool rather than against the national shortage. It is also why we publish our clients' results in full, including the portfolios that underperformed. A rent that was assumed instead of tested is one of the most common reasons a portfolio ends up in the bottom of that spread.

Structure beats timing. The right asset on the right street, underwritten on what tenants can actually pay, holds up when the queue at the open home stops meaning anything.

Want to see how we test a rent assumption like his, street by street, before a contract is signed? Join Jacob's free live webinar.