In last week’s newsletter we discussed the economic drivers that have led to the much reported softening yields that have occurred Australia wide. Today, we look at an important facet of the property investment market closely aligned to rental yields: vacancy rates.
Rental yields and vacancy rates are negatively correlated. This means that as rental yields decline, vacancy rates have a tendency to increase. In terms of causality, as vacancy rates trend upward, negative pressure is placed on rental yields.
There are three factors that have led to the higher vacancy rates:
- The recent investor led upswing in the property market (investment loans as a proportion of total loans reached the highest ever recorded level in October 2013, at 41.2 per cent) has significantly increased the supply of rental stock. The simple equation of supply and demand tells us that extra supply, when not met with a proportionate increase in demand, places upward pressure on vacancy rates.
- In addition, the current market of record low interest rates has resulted in many renters now buying. This phenomenon has occurred Australia wide and has resulted in decreased demand in the rental market. In many markets it is now cheaper to buy than to rent, meaning the rental pool in some areas has depleted.
- Developers are also finding, through a combination of favourable market conditions and council zoning changes, that sites are feasible when twelve to eighteen months ago they were not – further increasing supply for those ever-ready investors.
Taken together, these factors result in increasing vacancy rates, which we have seen in ALL markets. The Blue Wealth philosophy of investing in the right asset at the right time has never been as important as it is now. Investing in an asset that has attributes which create renter, investor and owner occupier demand places you in the best position both now and into the future. In addition, Blue Wealth’s strong position in the marketplace allows us to negotiate exclusive incentives for our clients, one of the most important of which is protection against vacancy.