Why falling house prices won't bring rents down
With house prices falling for six straight months, many renters are hoping the slide will finally show up in their favour at the next lease renewal. That relief is unlikely to arrive, and the reason comes down to an idea that rarely gets talked about: house prices sit on top of rents, not the other way around.
What's happening with prices
Cotality's latest numbers show home values fell another 1.1% in September - the sixth consecutive monthly fall. Prices nationally are about 5% below their March peak, and Sydney and Melbourne are down further, roughly 9% and 7% from their highs.
Meanwhile, rents rose 5.5% over the past year.
The usual explanations for the price drop are higher interest rates (the RBA has lifted rates four times this year), buyers hitting the limit of what they can borrow, and the changes to negative gearing and capital gains tax. All of those affect how much people can or want to pay to own a house. None of them changes how much people need somewhere to live.
Homes are priced like investments
A house is an investment, and like any investment, it is worth the income it can produce. For a house, that income is rent.
Investors rarely pay a premium for the kitchen or the view. They look at how much rent a property brings in and what return that represents on the price. If the numbers stack up against the alternatives, they buy. That calculation sets the floor under a home's value: if prices ever dropped below it, investors would see a bargain and buy in, and renters would start buying too, because owning would be cheaper than renting. Either way, prices get pushed back up.
Anything paid above that floor is speculation - the extra buyers are willing to pay because they expect prices to keep rising, or because cheap loans and tax breaks make the bet worthwhile. That is the part that moves with interest rates and sentiment. The floor underneath it moves with rent.
A simple example
Take a house that rents for $50,000 a year. An investor happy with a 5% return would pay about $1 million for it, because 5% of $1 million is $50,000. That is what the house is worth on the rent alone, with no guessing about the future involved. (In practice, costs and taxes come out of that rent first, which brings the price down a little.)
Now say it actually sells for $1.2 million. The extra $200,000 has nothing to do with the rent. It is buyers paying more because they expect prices to keep going up - the speculative share of the price.
When rates rise and the tax benefits shrink, buyers stop paying that extra $200,000, and the price drifts back towards $1 million. The rent doesn't move, though. Someone still has to live there, and they are still paying $50,000 a year.
And if rents keep rising - say to $52,500 - that same house is now worth $1.05 million on the rent alone. The floor rises even while the speculative share is shrinking.
That appears to be what is happening now. Prices are coming down, rents are going up, and the two are converging. According to Cotality's October report, rent as a share of the price is now the highest it has been since 2019.
Why rents won't follow prices down
Landlords don't set rent based on what a house is worth. They set it based on what the next tenant will pay. If ten people show up to an open inspection, the rent is going up, regardless of what happened to prices that month.
A drop in house prices doesn't create any new homes, and it doesn't make anyone stop needing one. The thing that actually decides rent - how many people are chasing how many places - stays the same.
If anything, the forces driving prices down could make renting tougher. Landlords with mortgages are paying more in interest, and many will try to pass that on. Would-be buyers may keep renting for longer because they can't borrow as much. Some investors will sell to owner-occupiers, which removes those homes from the rental market. And builders tend to slow down when prices are falling, which means fewer new places a few years from now.
Rents have risen by around $200 a week across the country over the last five years. That happened because there weren't enough homes for everyone who needed one, and a dip in house prices doesn't change that.
The caveats
None of this means rents can only go up. Rent growth is already slowing: the monthly increase in September was the smallest since May 2025, and vacancy rates have crept up from 1.5% to 2% since February, according to the ABC. Many renters are moving into larger share houses to cope, and rents cannot rise faster than wages indefinitely.
The floor isn't fixed either. When interest rates are high, investors demand a better return, because a decent one is available just leaving money in the bank. If they want 6% instead of 5%, that $50,000-a-year house is only worth about $833,000 to them. Prices can therefore fall further than expected without rents budging.
And if prices fall far enough, some renters will buy, which would take a little pressure off rents over time.
But if rents do come down, it will be because enough homes finally get built, or because demand eases - not because house prices dropped. Renters hoping a price correction will flow through to their lease are likely to be waiting a long time.
