What is a ‘vacancy rate’? Investment terms explained

The vacancy rate, usually expressed as a percentage, is a very useful statistic that helps property investors to assess activity in an area. Most often, it is used to determine rental demand.

It is a statistic that is used as a measurement for the number of rental properties that are vacant, or empty. Another way of phrasing this is to say that it denotes how many properties are untenanted at the time of counting.

A number of different bodies supply vacancy rate data, including the Real Estate Institutes. The Real Estate Institutes’ data is usually calculated upon their members’ statistics.

Usually calculated by comparing properties that are listed as available for rent (or vacant) to those that are counted as investment properties, one of the leading providers of this data, SQM Research, explains that their series starts from January 2005.

Their statistics are based on all monitored unique online listings for the period of the calendar month, taken from monitoring the major listings site, at which point they only use properties with unique addresses or unique listing identifications, while excluding those with no address and then getting rid of repeat addresses.

They note that only “those listings that have been advertised for three weeks or more (and are still currently advertised as at the time of collation) are used”.

To then determine the statistic, they use the last census data’s number of total established dwellings as their base figure, as well as more recent estimates, and then multiply it by the number of renters per postcode.

A higher vacancy rate suggests a higher number of vacant properties compared to an area with a lower vacancy rate – which many investors use to suggest that their investment will find it harder to obtain a tenant due to a higher number of rentals available as competition.

Areas with very low vacancy rates, usually sub-2%, are often called “tight” rental markets. This type of market suggests one where rental competition is high, where rents are more likely to be increased and where landlords can have their pick of tenants. It may also be called a 'landlord's market'.

A 3% vacancy rate is the point at which a market is set to be evenly balance between landlords and renters. Above 3% and renters have greater power to negotiate cheaper rents and the market looks less enticing to property investors. It may be known as a 'renter's market'.

What are our capitals’ vacancy rates at present?

• Sydney: 1.8%
• Canberra: 2.1%
• Darwin: 1.4%
• Brisbane: 2.3%
• Adelaide: 1.5%
• Hobart: 1.7%
• Melbourne: 2.6%
• Perth: 2.5%

Source: SQM Research

Using these broader statistics can give a good understanding of the overall condition in each city, but bear in mind that each city’s “norm” tends to be different. Sydney’s low vacancy rate is a characteristic of the market that has been present for a long period of time.

However, vacancy rates needn’t only be considered on a city-wide basis, suburb-specific details are also available that can provide a greater insight into the locality you’re considering. Some are vastly different from their city’s figure, for instance, Sydney’s Mount Druitt is recording a 0.7% vacancy rate.

Individual vacancy rate statistics on their own are also not as powerful as considering the trends in an area. If the vacancy rate is tracking down, this could mean good things with demand heating up. Similarly, a vacancy rate that is heading up may suggest that there is a gradual tenant exodus out of the area, or it could mean that many investors have recently bought in or that a new development has been completed.

Abrupt changes can also be seen, and can alert to property market busts. For instance, mining town Moranbah currently sits at 6.9% vacancy rate, compared to sub-1.0% a couple of years ago. Ex-mining town Zeehan, in Tasmania, is currently recording a 20.8% vacancy rate, a number that has been tracking up for some years, as well as significant median price drops. Looking at weekly rental changes in comparison to the vacancy rate change can also be illuminating.

As you can see, a vacancy rate can be the very first number that gets you delving closer into an area.

What these vacancy rates do not show, however, are the differences based on dwelling type. Individual investors would be wise to do some of their own research and question prominent local property managers about any specific types of rentals that sit vacant.

If tenants are desirous for well-renovated three bedroom houses, then having a poorly presented studio on a busy road is going to bring you a result far worse than expected based on statistics alone. It’s also worth asking property managers for the vacancy rates on their own books – this will alert you to the real time performance of the individual real estate agencies that will potentially be managing your properties.

Investors should also be aware that small areas with very few rentals are also likely to be less statistically reliable and will require more individual research to determine what the true demand is.