Capital city units saw the highest quarterly and annual growth ever recorded by Domain, with the rental squeeze showing few signs of easing.

Unit rents were up by 6.5 per cent over the September quarter and 16.7 per cent annually, the property market researcher found.

House rents lifted by 1.9 per cent over the quarter and 12.8 per cent for the year.

Rapid growth in house rents has priced out some renters who are now looking at the more affordable rental market, adding to demand for flats.

The return of foreign students has also ramped up demand for units, Domain research and economics chief Dr Nicola Powell said.

Powell said the rental crunch had been caused by both restricted supply and boosted demand.

She said higher migration and changing household formations were adding to demand, with higher borrowing costs also stopping some households exiting the rental market for home ownership.

On the supply side, she pointed to delayed building projects, weaker investment activity and landlords flipping households onto the short-term rental market as tourists returned.

“The consecutive run of interest rate hikes may have also pushed some landlords to pass on additional home loan costs,” she said.

One positive is that gross yields are also at their highest point on record, which should attract more investors and boost supply.

Powell also said commonwealth rent assistance was falling behind rental increases and called for a rise in payments for low-income households.

She also voiced her support for encouraging private investment in housing, including affordable housing.

Last week, the government unveiled a new investor roundtable to explore opportunities for government co-investment in housing.

“If we encourage investors away from the short-term rental market and promote participation in social and affordable government housing programs through financial incentives, we will see some pressure ease in the rental market,” Powell said.