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.

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.