Sydney is tipped to replace Canberra as the most expensive capital city for renters as migration picks up in the harbourside city.
Canberra was the only city to record a decline in rents in the three months to September, according to CoreLogic, with asking rents falling by 0.4 per cent.
CoreLogic's Kaytlin Ezzy said the gap between the two most expensive rental markets was narrowing.
"Given international migration is expected to continue to support rental demand across Sydney while affordability is expected to hamper Canberra's rental growth, it's likely we'll see Sydney overtake Canberra as Australia's most expensive capital city rental market in the coming months," Ms Ezzy said.
CoreLogic's quarterly rental market check-in revealed strong rental growth was starting to taper as renters hit the ceiling of what they could afford.
Asking rents surged by a record 10 per cent in the year to September but monthly and quarterly growth slowed.
Asking rents have soared by $90 on average since pandemic lows.
Competition for rentals remains fierce, with national vacancy rates - the proportion of available properties - hitting a record high of 1.1 per cent in September.
Low vacancy rates mean landlords can afford to hike rents as tenants have no cheaper options.
Low-income renters are about to be squeezed further as the national rental affordability scheme ends.
The scheme, which subsidises housing providers to rent out properties for at least 20 per cent below market rates, was ditched by the Abbot government in 2014.
The scheme provided more than 27,000 subsidised homes but is due to be phased out during the next four years.
Everybody's Home spokesperson Kate Colvin said winding down the scheme would cancel out the 25,000 extra social housing dwellings promised by the new government's housing fund.
Ms Ezzy said the rental crunch had in part been caused by a lack of investor activity between 2017 and 2020.
She said investors had looked to cash out on massive capital gains during the recent property upswing.
But falling house prices and soaring rents have lifted gross rental yields to 3.57 per cent, which could attract some investors back into the market.
"Once interest rates have stabilised, higher yields coupled with lower values and stronger buying conditions could entice more investors to enter the market, which would ultimately help raise rental supply," she said.
