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By Picki
Vacancy rates are like the heartbeat of the rental property market. They tell us how many rental homes are available and help us gauge the risk of our investments sitting empty. But what if the traditional way of calculating vacancy rates is hiding the real story?
Many investors rely on the traditional vacancy rate calculation: the number of properties available for rent divided by the total number of properties in a suburb. It seems straightforward, right? But this method paints an incomplete picture.
It's like trying to judge the popularity of a movie by counting the number of seats in a theater rather than the number of people actually buying tickets. You might think the movie is a hit because the theater has lots of seats, but if few people are buying tickets, the reality is quite different.
By relying on this outdated method, you might believe you're investing in a safe area with low vacancy rates. But in reality, your property could end up sitting vacant for months. Even worse, you might invest at the peak of a rental market, just before vacancy rates skyrocket due to oversupply or shifting demand.
During the COVID-19 pandemic, Australians changed how and where they wanted to live. Vacancy rates across the nation dropped by over one percent - NOTE - third party data used for impartiality.
Suddenly, the old rule of a 3% vacancy rate indicating a balanced market became meaningless. If you're using these traditional calculations, you're navigating the property market with an outdated map.
At Picki, we've developed a better way to understand vacancy rates. We call it the Vacancy Momentum Metric. This isn't just a fancy term—it's a new lens that gives you a clearer, more accurate view of the rental market.
Traditional vacancy rates only tell you how many properties are vacant right now, without context. Our metric looks at how vacancy rates are changing over time and considers the turnover in the rental market. It's like upgrading from a static photograph to a live video—you see not just a snapshot but the whole story unfolding.
Instead of comparing vacant rentals to all properties in a suburb (including owner-occupied homes that will never enter the rental market), we compare vacant rentals to the number of investment properties. This gives a more accurate picture of the actual rental market risk.
Churchill is a popular suburb with investors - located in Townsville. As of 20/10/2024, there are 11 properties available for rent.
There are 4849 dwellings in this suburb. This would mean that using the traditional formula, the current vacancy rate is basically non existent @ 0.2%.
This may, however, be a little deceptive as there are only 743 dwelling that are currently rented in this suburb. So an alternative method to calculate Vacancy rates would be to compare the 11 properties available, against the 743 dwellings that are usually classified as rental properties.
Using this formula, the vacancy rate would be 11/743 = 1.48%.
This is still low, and does still suggest a very tight rental market. But it does not consider the turnover in the market. In the last month, there have been 23 properties that were rented.
Picki would then calculate the vacancy rate momentum rate to be 23/743 = 3.1%.
Is this acceptable? Lets put this Churchill vacancy information into context by analyzing another suburb.
Delacombe in Victoria also has a very low number of properties currently available to rent - 6 properties (20/10/2024). The suburb has 2,363 dwelling, so the traditional Vacancy rate calculation would be 6/2,363 = 0.2%. The same as Churchill.
In the suburb, the are ONLY 413 properties that are currently rented (about 15% of the suburb). So using the second formula, the vacancy rate would jump up to 1.4%. Once again very similiar to Churchill.
It is not until we analyse the Picki formula, do we start to get an idea of what is REALLY happening in this market. You see in the last month, there were actually 62!! properties that were rented. That means using the Picki formula, we calculate a Rental Vacancy Momentum rate of 62/413=15%.
A very different result to Churchill.
Think of this in another way, in Delacombe over 15% of all rental properties are turning over each and every month, a rate 5X higher when compared to Churchill.
This dramatically higher turnover rate presents far more risk to the investor. What if the volume of new listings was to continue, but the demand for these rentals was to slow down. Vacancy rates could blow out very quickly! You would classify this rental market as VERY Heated - perhaps entering a market top. A risky scenario - one in which we would expect Vacancy rates to start increasing month to month.
In contrast, Churchill has a very LOW vacancy rate, on much lower and more sustainable volumes. Even if demand for rentals slows slightly, then with a far lower volume of new rental listings hitting the market - we have far less exposure to rapidly increasing vacancy rates.
As a property investor, your primary concern is whether your property will generate consistent rental income. By using our metric, you get a clearer sense of the risk of your property sitting vacant. You can make informed decisions based on accurate data, not outdated assumptions.
Investing in a market that appears healthy but is actually on the decline can be costly. By looking at how vacancy rates are changing over time and understanding the rental market's momentum, you can avoid buying at the peak and getting caught when the market shifts.
Markets with improving vacancy rates and healthy rental turnover often lead to stronger capital growth. Our metric helps you identify these areas poised for growth, giving you a head start on smart investment opportunities.
Over the past decade, we've evolved our technology and artificial intelligence to analyze various vacancy rate formulas. We discovered that our Vacancy Momentum Metric is more strongly associated with future capital growth than traditional methods.
By considering factors like rental turnover and changes in vacancy rates over time, we've created a more reliable indicator of a market's health. This isn't just theory—we've seen the results in practice, helping investors like you make better decisions.
On Picki, you can:
- View the Picki Vacancy Rate for every suburb in Australia.
- See How Vacancy Rates Change Over Time, giving you insight into market momentum.
- Filter and Sort Suburbs based on their Picki Vacancy Rates to find areas that match your investment goals.
We provide you with the tools to dive deep into the data, so you can invest with confidence.
We believe in empowering investors with knowledge. If you'd like to discuss this topic further, join us on our Reddit community - https://www.reddit.com/r/picki/. Connect with other investors, share insights, and stay informed about the latest trends in the property market.
Don't let outdated metrics steer you wrong. With Picki's advanced tools and insights, you can see the full picture and make smarter investment decisions.
Visit https://www.picki.com.au/pricing and explore how our Vacancy Momentum Metric can help you invest with confidence.
