Why You Must Understand Rental Vacancy Rates

Why You Must Understand Rental Vacancy Rates

For any manufacturer, having an idea of the anticipated demand for the product they manufacture is enormously helpful. The more data they have to go on, the better they can anticipate their manufacturing costs and the time it will take to produce enough product to meet demand. Similarly, it is helpful for construction businesses, property owners, and landlords to grasp how much demand there will be for residential properties they oversee. For property investors, this metric is the vacancy rate.

What are vacancy rates?

In the simplest terms, vacancy rates measure the percentage of rental properties that have been advertised for at least three weeks and are still vacant. This definition comes from SQM research, an independent property advisory and research house. Other organisations might measure vacancy after a different period of time, but three weeks is a good average.

SQM is widely regarded as a leading authority on vacancy data; property investors trust their analyses throughout Australia. They provide a comprehensive analysis of vacancy rates available for free on their website and broken down by state, city, and suburb.

Why is this data useful?

Vacancy rates are essential for property investors because they indicate how much competition there is for rental properties in local markets. As well as indicating what the local competition for investment properties is like, it also shows which localities are going to be the most challenging in terms of finding tenants. For reference, a vacancy rate of 3% is considered healthy; at this rate, property investors can be confident their properties will find tenants with relative ease.

A vacancy rate of 2% or less suggests that demand for rental properties in the area is very high and new properties will be filled quickly. However, a vacancy rate of 4% or more is indicative of a market with more stock than demand. Investors should be cautious before investing heavily in property in an area with a vacancy rate of 4% or more.

Investors should prioritise investments in areas with lower vacancy rates. Naturally, these areas attract much more competition. If vacancy rates remain low, property prices will increase as investors seek to capitalise on the low vacancy rates. However, low vacancy rates confer some important benefits:

  • A greater selection of applicants, improving your chances of finding quality tenants.
  • Potential for higher rental rates because more tenants are competing for the limited number of vacant properties.
  • In some cases, there will be fewer landlords to compete with. While a low vacancy rate attracts property investors, it’s harder for new landlords to move in.

How to interpret the data

Any property investor eyeing an investment in a specific property should investigate the local area’s vacancy rate. Don’t just look at the figure in isolation, though. You should also compare the local area’s vacancy rate with the average for the state and city to evaluate the value of any investment property.

You should also remember that the vacancy rate can vary significantly within major cities. For example, since October 2015, Melbourne has as a whole has had a vacancy rate of 2.4%. But the city’s Central Business District has consistently had a vacancy rate of 3%, and some of the inner suburbs have been pushing even higher rates. The vacancy rate for the Docklands is 3.4%, and the Southbank’s rate is 5.2%. Meanwhile, Melbourne’s suburbs frequently measure a rate of less than 1%, such as 0.8% for Carrum Downs.

Vacancy rates are essential metrics for any property investor. Don’t invest in any rental property without first investigating the vacancy rate for the surrounding area. Remember that the vacancy rate within cities and other urban conurbations can vary substantially.