The perception of low vacancy rates by many property investors in Australia has created a misconception that low vacancy rates are always an indicator of a great opportunity. Vacancy rates have been at or near a historic low across many property markets in Australia since they were reported years ago, which is why there are so many headlines telling property investors that now is a fantastic opportunity. The current Australian national residential average for a vacancy rate sits around the average of approximately 1.2 % or well below the long-term averages.
Here’s the thing. Vacancy rates are an important consideration for investors, but not in all cases as most people would think or assume.
Low vacancy rates can benefit the property investor by decreasing their risk related to a property investment and increasing the passive income generated through rental properties or cash flow. However, on the other hand, if not being utilised appropriately, low vacancy rates can lead potential investors into paying too much for a property that does not provide good rental returns or is ultimately underperforming.
This article outlines what low vacancy rates actually mean to you as an investor, what low vacancy rates do not mean, and how to properly use this metric as a potential property investor within the Australian environment.
What is a vacancy rate and what counts as “low” in Australia
A vacancy rate consists of the portion of leased properties in a certain location that are unoccupied and offered for rent, expressed as a percentage, at a certain time. Practically, it indicates the difficulty level of finding a property for tenants and how much selection they have.
Most analysts set as a standard the rental market with three percent vacancy rate as a balanced situation. At this point, the tenant’s needs are met as there is enough supply, but the owner can also avoid lowering the rents through the competition.
Recent Australian data from sources like SQM Research and the rental insights section of the Australian Bureau of Statistics shows that vacancy in many cities has been sitting closer to one percent or even lower at different points in the cycle. That is a clear sign of a very tight rental market.
As a rule of thumb for investors:
- Below one percent (<1%)
Very tight market, tenants competing for very limited stock - One to two percent (1-2%)
Tight market, landlords generally have the upper hand - Around three percent (3%)
Closer to balanced conditions - Above four percent (>4%)
Softer market, landlords may need to discount or offer incentives
These are general guides only. Each suburb and property type can behave differently.
What low vacancy rates really mean for investors
When used properly, low vacancy rates can give investors several advantages.
- Stronger underlying rental demand
The demand for rental housing is typically outpacing supply when the vacancy rate is significantly below three percent. This can arise from population growth, migration, limited building, or all three. Tight vacancy is linked to rising rents and persistent rental stress, according to recent Australian data.
A single advertised rent is not as important to an investor as that demand picture. It indicates that there is a large pool of possible tenants and a lower chance of lengthy lease gaps.
- Shorter vacancy between tenancies
In a tight market, well presented properties in good locations often rent quickly. This may enable you to be more picky about the kind of tenants you accept and lower your holding costs in between leases. It also supports a more predictable cash flow, which is crucial if you are highly geared.
- Support for rental growth
Landlords may be able to raise rents at lease renewal or when a new tenant moves in when vacancy is extremely low and supply is limited. Market reports from sources such as SQM Research and ABS rental statistics show that periods of very low vacancy have often coincided with strong rent growth in many parts of Australia.
This does not mean you should push rents to the absolute limit with every lease. Rather than trying to extract every last penny, long-term investors frequently prefer to retain excellent tenants at a fair market rent. However, a tight vacancy backdrop gives you more flexibility than a soft market.
- A signal that new supply may eventually follow
Larger institutions and developers closely watch vacancy. When vacancy stays very low for a long time, it can finally attract more building activity. You can see this in reports from CBRE Australia and other agencies that track the pipeline of new apartments and townhouses.
As an investor, you want to know whether an area is likely to stay undersupplied, or whether a wave of new projects may increase competition over the coming years.
What low vacancy rates do not mean
This is where many investors misread the data. Low vacancy is important, but it does not guarantee a strong overall investment.
Low vacancy does not guarantee capital growth
Vacancy rates tell you about rental supply and demand. Capital growth depends on a variety of factors, including interest rates, borrowing capacity, household incomes, infrastructure and sentiment. There are markets where vacancy fell, rents rose, but prices went sideways because buyers had already pushed values to a level where growth stalled.
Low vacancy does not mean every property is safe
Vacancy is usually published at city or suburb level. Within that average there can still be pockets that struggle. Examples include investor heavy towers where many very similar units hit the market at once or properties on noisy main roads that tenants avoid.
You still need to assess each property on its individual merits. Things like floor plan, natural light, parking, aspect, and proximity to amenities all play a big role in tenant appeal.
Low vacancy does not remove regulatory risk
Even in a tight market, regulatory and tax changes can affect investor returns. Discussions around rental standards, land tax changes and tenancy protections have been active across several Australian states in recent years. Vacancy rates do not tell you anything about those risks. This is one reason to keep an eye on independent education sites like MoneySmart for general guidance.
Low vacancy does not justify paying any price
One of the most common mistakes is to blindly buy an asset based on an artificially high Yield, as everybody tells you that vacancy is low and rents continue to go up. Consequently, if you are overpaying for an asset with a high yield, your long-term performance may be negatively affected. Even though, for a limited time, the rental market may perform well, savvy investors perform a Stress Test on both their Cash Flow and Expected Returns.
How to use vacancy data in a real investment decision
Here is a simple framework to use vacancy rates the way professionals do.
Look at the trend not just the latest reading
Consulting SQM Research data and Domain rental market reports show differences in the way two different markets behave after experiencing dramatic drops in vacancies over several years. For instance, a market that quickly dropped in vacancy rate from 3% to 1% will have a very different set of behavior patterns compared to a market that has maintained close to 1% vacancy for 10 years+.
Drill down to the micro market
Where possible, check vacancy for houses vs units as well as neighboring suburbs. You can also check the number of similar properties listed on major portals like realestate.com.au as well as for how long the listings have been online. This gives you a practical feel for actual competition.
Overlay rent growth and affordability
Align the numbers for vacant rentals with the visual representations of rent trends that come from such sources like ABS rental statistics and domain reports. If rents in the area are already high compared to the wages, the tenants cannot afford to pay more than an increase in rent. This situation can cause the tenants to have the extra rental stress and move to share houses, go to a more distant place from their work, or leave the area altogether.
Check the future supply pipeline
Use research from agencies such as CBRE Australia and official building approvals from the ABS to find out when new supplies are expected. Five years from now, an area with a high vacancy rate but numerous ongoing projects could look very different.
Run best case and worst case scenarios
It’s advisable to calculate the scenarios before making a purchase. Inquire about the results of minor increases in rents, stagnant situations, or if there is a slight movement back to the three percent vacancy rate and you have to wait longer between tenancies.
Low vacancy rates are one of the most useful indicators in the Australian property market. They provide you with a clear picture of leasing risk, rental demand, and rental growth potential. Many Australian locations are currently far below the vacancy levels typically found in a balanced rental market.
Low vacancy, however, is not a foolproof assurance. It does not automatically deliver capital growth. It does not remove regulatory risk. It does not protect you from overpaying or from buying the wrong property.
Vacancy rates are viewed by the best investors as a crucial component of a bigger picture. They combine the information with meticulous suburb selection, property-level due diligence, realistic cash flow modeling, and situation-specific expert advice.
If you are looking for assistance in reviewing a specific suburb or very short list of properties and want assistance with the interpretation of vacancy data, you can get in touch with our team. We would be happy to go through the numbers with you and help you evaluate whether the opportunity aligns with your investment plan.
