In Sydney, rents fell 0.4 per cent in the September quarter, leading a broader slowdown in rental growth as vacancy rates edged up across the nation, data provider Cotality reported on Friday.
Across Australia, rents grew at 0.5 per cent in the quarter, down from the 1.6 per cent increase in the June quarter and 2.1 per cent in the three months to March.
Annual rental growth eased from 5.9 per cent to 5.5 per cent, as the national median dwelling rent hit a record high $713 per week.
Cotality research director Tim Lawless said the market was softening as more renters reached their affordability limits and adjusted their household sizes.
"With rental affordability so stretched and broader cost-of-living pressures, rental demand is likely to be restructuring as people form larger households, stay in the family home for longer or look further afield for more affordable accommodation," he said.
Vacancy rates, which had been historically tight since the post-pandemic migration spike, have rebounded.
As net overseas migration has since normalised, annual population growth eased to 1.4 per cent in the year to March 2026, below the pre-COVID-19 decade average of 1.6 per cent, Mr Lawless said.
After reaching a record low of 1.5 per cent in February, the national vacancy rate climbed to 1.7 per cent in the March and June quarters and hit 2.1 per cent in September.
In Sydney, the vacancy rate was 2.5 per cent, compared with 1.8 per cent a year earlier.
"Rents have risen substantially faster than incomes over the past six years, while cost-of-living pressures are likely to remain elevated. Rental growth appears to have reached, or is close to, a ceiling," Mr Lawless said.
"Vacancy rates may remain relatively tight, but renters simply have less capacity to absorb the rate of increases we've seen over recent years."
Labor's changes to negative gearing and the capital gains tax discount were forecast in the budget to cause rents to increase an extra $2 per week than they otherwise would have.
Property groups, including Master Builders, the Property Council and the Real Estate Institute of Australia, commissioned modelling that showed a larger impact on rental prices.
Fewer property investors in the market would lead to less rental supply and an increase in the cost of renting, they argued.
Shadow Treasurer Tim Wilson told the National Press Club that rents would go up, just like they did in the 1980s, when Paul Keating briefly scrapped negative gearing.
But independent economist Saul Eslake said there was no evidence to support the claim.
"If a lie is big enough and you tell it often enough it becomes the truth," he told AAP.
When the Hawke government abolished negative gearing in 1986, rental growth only climbed materially in Sydney and Perth, where vacancy rates were already unusually low.
In every other capital, rental growth eased or held steady.
Property investors have been retreating from the market in 2026, as evidenced by June quarter lending figures, Mr Eslake said.
But that does not necessarily result in higher rents.
Every property not bought by an investor is by definition bought by an owner-occupier, which reduces demand in the rental market at the same time as it reduces supply, he said.
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