The average property investor will have heard the term “vacancy rate” thrown around often, but not everyone truly understands the meaning behind the term. In market analysis, there are a number of metrics that are used to measure the level of rental demand throughout a suburb. Rental yields and vacancy rates are two regularly used indicators which have a closely linked relationship. Often when rental yields decline (reactive to lessened rental demand) vacancy rates have a tendency to increase.
So, what do vacancy rates measure?
Vacancy rates give an indication of the percentage of properties that are vacant throughout a market. In general terms, the higher the level of vacant properties, the weaker the level of demand present from the local market. Typically, a vacancy rate equilibrium of 3% indicates a balanced healthy market. Anything above this equilibrium reflects a market that is in oversupply, while below indicates undersupply.
What causes vacancy rates to shift?
As vacancy rates are a metric of supply and demand, they are governed by two main aspects of the property market:
- Increased Supply
Additional properties within a suburb naturally increase vacancy rates. The delivery of new developments will create spikes in the proportion of vacant properties throughout a market while new tenants absorb additional properties. In saying this, strong rental markets generally see vacancy rates stay low as high demand absorbs new supply rapidly.
- Population Growth
The increase of residents throughout a market impacts vacancy rates in a positive aspect. Influxes of new residents will naturally create a tightening of rental markets, hence why Blue Chip markets operate with low vacancy rates. The contrasting effect can be seen when there is an outflow of residents from a rental market and vacancies spike.
Vacancy rates are an important factor to take into account before you invest. To put it in a nutshell, you should be looking for markets with low vacancy rates in order to capture markets with the strongest rental demand. Ultimately, selecting markets under pressure from tenant and owner occupiers alike, will allow you to hold quality assets for the long term. To give yourself the best opportunity to create and hold a strong portfolio, get in to Blue Wealth today and get educated.