Vacancy rate is a key indicator of the real estate rental market. It essentially tells you how easy it is to find tenants in an area, and investors use this information when deciding whether or not to invest there.
The best markets for property investing have low vacancy rates; these areas offer great opportunities due to high demand with little supply – meaning that renters will be more likely than usual to pay higher rent because they can’t find something else close by!
Investors should keep their eye on vacancies. If too many properties go vacant at once, then rents could drop as landlords try harder and compete against each other for potential tenants.
High vacancy can be a sign of oversupply or limited demand in the area, which may put downward pressure on property prices, affecting the capital growth potential of the investment.
Changes in vacancy rates can signal future trends. An increasing vacancy rate may suggest a slowing demand or increasing supply, while a decreasing rate could indicate rising demand or possibly lessening supply, which may affect rental yields and property values in the future.
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What is a Good Vacancy Rate?
Typically, rates above 3% indicate low demand markets. Property investors should target high demand rental markets to ensure continuous cashflow uninterrupted by tenant churn.
As a rule of thumb, markets with lowest possible vacancy rate is the safest bet for investment. Having said that, some capital growth focused strategists may consider markets with vacancy rates in the 2-3% range if other supply and demand metrics indicate a balanced or high demand market.
Learn more about the ranges for low, balanced and high demand markets by visiting our Data Dictionary page.
High vacancy rates can point to a higher risk investment location. Potential underlying issues may include economic factors such as job losses in the area, or an influx in new developments causing oversupply.
How do you Calculate Vacancy Rates?
To calculate the Vacancy Rate, divide vacant rental properties by the total number of rental dwellings in the suburb.
- Vacant rental properties are those that remain listed on the market for more than 21 days.
- Rental dwellings are estimated by apportioning the percentage of renter households to the total number of dwellings in the area.
Rental properties typically rent in a month, but this is not always the case. For example, some suburbs take over 30 days to get rented out. Additionally, units stay listed on the market for longer than houses do – sometimes up to three months instead of just one!
Property investors should target markets with DoRM below 35 days.
Vacancies are rental listings where the real estate agent has not found a tenant 21 days or more after the property was listed for rent.
Both DoRM and Vacancies metrics are sub-components of the Vacancy Rate metric formula. We recommend to rely on these metrics only when the Vacancy Rate is unknown.
High demand and/or low supply rental markets frequently have 0 vacancies since tenants ‘grab’ all properties way before the 21 day threshold.
Vacancy rate is a key demand indicator of the real estate rental market. Low vacancy rates can make an area more attractive for landlords considering an investment in rental property. They can also be helpful for current investors deciding between selling or holding onto a property.
The chart above illustrates Vacancy Rates for years 2021 to 2022. It shows that generally vacancy rates were trending down during the 2-year timeframe.
Upward trend in Vacancy Rates is excellent news for tenants, as higher percentages typically signal that rents will not climb as quickly, or even decline.
High vacancy rates usually point to low demand markets. If you’re an investor looking for your next property, you should be targeting markets with lower rates.
Remember that while a useful indicator, vacancy rates should not be considered in isolation. Other factors such as local economy, population growth, job market, and property condition should also be taken into account when making a property investment decision.
Download suburb Vacancy Rates from our digital store to learn more about how this data can help inform your investment decisions and find out which suburbs have higher demand!