Understanding rental market vacancy rates

Much has been made of the residential rental crisis in Australia. People are struggling to find a place to lease or are finding rents on the rise. The problem has to do with record low vacancy rates.

But what does that actually mean? And what do low vacancy rates mean in terms of rents, rental supply and - to put it simply - the number of places to lease? This article keeps you a step ahead of the rental crisis by taking a look at how vacancy rates affect the rental market.

What do vacancy rates indicate in rental markets?

Vacancy rates measure the percentage of rental properties in a given area that are empty and available for lease. This number is calculated by taking the number of vacant properties in an area and dividing it by the total number of properties in the area. For example, if an area has 10 vacant properties out of 100 total properties, the vacancy rate would be 10 per cent. Vacancy rates can also be seasonally adjusted to account for fluctuations in the market depending on the time of year, leading to adjustments in supply.

If a vacancy rate is too high, this usually means there are more rentals available than the number of potential tenants able to fill them. For property investors, this means they may struggle to let their property. In a low vacancy rate environment, tenants may struggle to find a property because of low rental listings. They may face higher rents due to excessive demand, making it more of a landlords' market. Many regions across the country are facing record low vacancy rates and, in terms of rentals, higher rents.

What is a good vacancy rate in Australia?

The REIQ puts rental property markets into three categories: tight, healthy, or weak. These markets are based on the vacancy rate:

· 0 – 2.5 per cent = tight

· 2.6 – 3.5 per cent = healthy

· 3.6 per cent – plus = weak

Is there a rental supply shortage in Australia?

There is currently a shortage of rental supply across the country. According to data from SQM Research, the vacancy rate in the national rental market was at 1.0 per cent in January 2023, well down from its most recent high of 2.9 per cent in April 2020. This is indicative of a shortage in the supply of vacant properties and high rental demand. This shortage has been attributed to several factors, including a lack of new housing construction, rising demand for rental housing due to population growth, and an increasing number of people choosing to take up a lease rather than purchase a home. As a result, rental prices have been steadily increasing in most parts of the country.

In Queensland, renters faced a December 2022 quarter vacancy rate of 0.8 per cent, slightly higher than the state-wide vacancy rate of 0.6 per cent in the September quarter but still at a record low - according to REIQ data. REIQ CEO Antonia Mercorella says the vacancy rate is still far too low to be considered ‘healthy’ and it was too early to draw conclusions whether there was a material shift in the rental market following a recent rise in the vacancy rate.

“Promising as this news may seem, we’re taking it with a grain of salt until we see if this is uplift is here to stay or if it’s merely a seasonal fluctuation,” Mercorella says of the December 2023 quarter figure. "What this essentially means is the market is holding tight, and only time will tell if a trend is emerging. An influx of tenancy changeovers at the end of the year is certainly not a new phenomenon, and the past decade of vacancy rates reveals patterns of generally higher vacancies in December.

“However, the REIQ is hearing from property managers that there is noticeably less exit and entry activity than usual, as there’s still plenty of tenants who are staying put and choosing to renew their lease rather than compete for a new place. Even with this small improvement in rates, let’s not forget that we’re still talking about incredibly low vacancy figures which tells us there’s no-where near enough rental properties to meet demand, and tough conditions continue for tenants.”

SQM Research says, in the 30 days to 12 February 2023, the national median weekly asking rent for a dwelling (unit or house) was $562 a week. Sydney recorded the highest weekly rent for a house at $913 a week. Adelaide units offered the best rental affordability of all capital cities at $401 a week. In the week commencing 10 February 2023, Brisbane's median weekly asking rent for houses and units was $592.

Mercorella says the rental supply crisis and the crippling low vacancy rate in Queensland ultimately comes back to supply. She says, “This is not a problem that has emerged overnight, and while COVID has had a role to play, the number of dwellings being built in Queensland has diminished considerably over the last five years and our future pipeline is also likely to fall short of demand. Until we are able to achieve a greater balance between the demand for rental housing and supply, and introduce greater diversity of housing, we won’t be able to fix this critical problem we are facing.

“What’s needed is a concerted effort from all levels of government to create the right environment to sustain existing established rental stock and to build new housing each year that matches targets based on detailed population forecasts.”

How do Brisbane vacancy rates compare to other capital cities?

Some of the lowest vacancy rates on record are being experienced in capital city and regional locations across the country. This makes it tough for renters and puts pressure on rents, rental listings and the number of available rentals.

Of all the capital cities, Brisbane has one of the tightest markets with am extremely low vacancy rate. The city recorded a 0.8 per cent vacancy rate in January 2023 - falling from 1.1 per cent in December 2022, according to SQM Research. The only other capital cities overtaking Brisbane in having the tightest vacancy rate were Perth at 0.4 per cent and Hobart at 0.7 per cent. In January, Melbourne dropped from 1.7 per cent to 1.2 per cent and Sydney fell to 1.3 per cent in terms of rental vacancies.

SQM Research noted seasonal factors led to a brief rise in rental vacancies over December 2022. However, the company said the national rental market had returned quickly back to its extremely tight conditions and was expected to continue to record ongoing tight conditions, or worse over February and March, making it tough for renters. The surge in net overseas arrivals relative to new residential rental supply was ensuring extremely tight conditions and limited vacancies would continue for the immediate future.

SQM Research Managing Director Louis Christopher says an ongoing increase in rents is pushing up rental yields, which means increased returns for property investors.

"I believe ‘would-be’ investors will be attracted to higher rental yields in later 2023, provided the cash rate peaks at below 4%," Christopher says. "However, if the cash rate rises above 4% it is likely home buyers including investors will largely stay away from the housing market for another year, and so investment dwelling approvals will remain in the doldrums, setting us up for another super tight rental market in later 2024 and 2025.”

Read about the challenges that can arise for property managers with a tight rental market here. Check out our selection of property management articles.