Watching rental market vacancy rate trends key for investment success: Propertyology's Simon Pressley

Analysing trends of the number of properties advertised for rent is the single most useful metric for property investors to make informed property management decisions. Propertyology has just completed an analysis of rental market trends across Australia and there are some interesting trends developing.

The most common method for reporting the state of a rental market is vacancy rates. Data houses such as SQM Research do this by calculating the number of properties advertised for rent as a percentage of all rental properties within that given market. For example, if a specific location had one thousand properties which make up the total rental pool and twenty five of those owners were looking for a tenant the vacancy rate would be 2.5%.

A 3% vacancy rate is considered to be a ‘normal’ market. In my experience, pressure starts to build on rental prices when vacancy rates fall below 2%.

While the vacancy rate of a particular location at a particular time is useful information I find it even more meaningful to understand the rental trends which have been forming leading up to that point in time – is the available number of properties increasing or decreasing?

Imagine yourself receiving that friendly reminder from your property manager that a lease on one of your investment properties is getting close to expiry - the tenant has stated that they will not be renewing, and your property manager now needs your instructions on what rental price to advertise your property for. Propertyology is often asked by our clients to provide input in scenarios just like this.

The most appropriate response in this situation would be different if the property was in the south-west Queensland town of Roma compared to the Nation’s capital, Canberra. Research conducted by Propertyology confirms that Roma has experienced the biggest increase in the number of properties advertised for rent over the last 12 months (from 42 to 173). Canberra has experienced the biggest decrease (from 1,056 properties to 737).

When rental trends show a significant increase in volumes of properties available the most appropriate response by the landlord is often to set the rent below the rest of your competition. 80% of something is more than 100% of nothing; rents don’t always go up. And, unless there is a pending economic shift which gives hope for a reversal of this trend in the short term it might also be appropriate to seek a 12 month term as opposed to the traditional six months.

Conversely, there is more scope to increase rents when there is a limited number of properties for tenants to choose from. And, if the trend appears to be that the number of properties available is likely to decline it might be appropriate to stick with a short-term lease.  Port Macquarie in New South Wales (from 171 properties to 119), Muswellbrook in Hunter Valley (from 226 to 167), and Gold Coast (from 2,665 to 2,125) have also seen a significant reduction in the number of properties advertised for rent.

As forecast by Propertyology quite some time ago, Darwin (79% more rentals) and Perth (31% increase on an already high base) have significantly more properties available for rent today compared to 12 months ago.

Factors which influence the number of properties advertised for rent include:

• The level of supply of new properties recently built;
• Seasonal factors such as school holiday periods, peak tourism periods, Christmas / New Year, agriculture seasons;
• Commencement and completion of large employment contracts; and
• Commodity price peaks and troughs.

Large volumes of properties purchased by investors (as opposed to owner-occupiers) within a short period of time will also result in more stock available in a defined rental pool. A good example of this is Sydney where it has been reported that as high as 70% of home loan approvals during 2014 were to investors (30 – 45% is ‘normal’). Logic would suggest that pressure on rents will start to ease in Sydney.

Astute property investors will also analyse rental trends as part of their broader research in determining where to invest (although there are far more important considerations than this).  

Property is an asset class which requires investors to hold for the long-term. Over the years of holding a property there will invariably be periods when there are large volumes of properties available for rent and other periods when the rental market is tight. The astute landlord will understand the economic drivers which influence demand for their market, the supply pipeline, and current rental trends.

Simon Pressley is Managing Director of Propertyology, a REIA Hall Of Fame Inductee, property market analyst, accredited property investment adviser, and Buyer’s Agent. Contact Simon here.