Understanding Vacancy Rates When Investing

  • Understanding Vacancy Rates When Investing image

Vacancy rates have been talked about a lot in the last couple of years. Mostly because they are at historic lows all around Australia, contributing to what many people see as a rental crisis. And with big immigration numbers and low levels of construction, vacancy rates will be talked about even more in the next couple of years.

What are vacancy rates?

A vacancy rate refers to the percentage of all rental properties in a suburb, city or region, which are currently available. So, if there are 1000 rental properties in a town and only 10 available, that’s a 1% vacancy rate. You might think ‘that’s not very many’ and you would be right, but it is also the current reality in a lot of markets. Australia’s national vacancy rate has been hovering around the 1% mark recently. Perth has seen closer to 0.5% of properties available and it’s similarly low in Brisbane and Adelaide.

This is why asking rents have been going up and up in recent times. These cities are balanced out by markets like Sydney and Melbourne, where vacancies have spent a lot of time between 1% and 2.5%. But that’s still not very balanced, because generally and historically, a vacancy rate of 3% is considered a balanced market between landlords and tenants.

Landlords have upper hand

Knowing 3% is balanced and considering that pre-Covid a number of markets were well above that mark, really shows just how dire the situation is for tenants at the moment. In some cities, hundreds of people are queueing for open inspections; while in some towns, you can even find there’s not a single rental property available. This doesn’t bode well for areas that are in need of transient workers in fields like hospitality, or that need to attract health staff for locum periods in hospitals. These are just two examples of many people that need rentals in order for a local economy to have all the pieces it needs to function.

What is driving the market?

Most property metrics are driven by supply and demand and rental vacancy, unsurprisingly, is no exception. But what contributes to the lack of supply?

First of all, construction has fallen behind all across Australia. Inflation, supply chain issues, staff shortages and rising interest rates have slowed the sector down so that it is way short of where it needs to be. Next, the government has raised the cap on foreign migration in the short term, most likely because it wants extra taxpayers and spenders to stave off recession in a volatile global economic environment. But with hundreds of thousands of extra people flowing into Australia, and an existing undersupply for the people already here, things are only going to get worse.

Then, there are all the Australians who would have been able to borrow to buy a property a couple of years ago but have since found themselves back in the rental competition pool, due to soaring interest rates eroding their borrowing power.

What should investors do?

Right now, conditions are right in your favour, at least when it comes to rental returns. There are still bargain buys out there, with more chance of being positively geared in this rental market.

If you already have investment properties, make sure you are getting a market rate of rent. Chances are your interest rates have been hiked significantly by banks, so achieving the market rate of rent will help cover the difference. You might hear the media calling investors ‘greedy landlords’, but make no mistake, tenants don’t volunteer to pay extra when vacancy rates are high. It’s important to stick to your strategy and make sure your returns get you where you need to be.

Managing vacancy

The current market won’t last forever, so you still need to be wary. There may be times in the future when your investment property is vacant between tenants. It’s important to protect yourself with a landlord insurance policy that includes cover for vacancies and the loss of rental income that will follow. If you don’t have a property manager, reach out to B.Invested and we can help put you in touch with the right professionals, or provide you with more information.



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