Knowing the Cycle: Vacancy Rates
Vacancy rates reflect the state of the economy
Often when property cycles are mentioned, price growth is at the forefront of people’s minds. Although capital growth is the most important factor for investors, there are many other components of the property cycle that contribute to one’s ability to purchase, hold and successfully dispose of their asset.
Over the next few weeks, we will consider some of these important factors. Today, we are looking at vacancy rates which is the percentage of rental homes in a suburb that do not have a tenant, which indicates the level of demand for rental accommodation in the area.
Economics will always have ‘grinners’ and ‘frowners’. One will also find themselves as both in some way at the same time. A favourite to consider is the regularly debated dollar-value paradox. Which of the following do we prefer? A high dollar that stimulates imports and the ability to holiday overseas, or a low dollar that stimulates exports and local tourism?
Similarly, we could consider the interest rate paradox. Which of the following do we prefer? Low interest rates that make it more affordable to hold an investment property, and high interest rates that ensure renters don’t move out and buy their own home?
Interest rates have been sustained at low levels for quite some time and arguably, this is likely to continue. Low interest rates are intended to stimulate economic activity due to the discounted ‘cost of credit’ that encourages spending.
By quickly considering the relationship between supply and demand, we know that if supply of property is increasing due to the lower cost of credit, and the rental demand is reducing as tenants buy their own homes, vacancy rates of investment properties will subsequently increase.
The increase in vacancies is what we are now finding across the country. This is most prevalent in areas that rely on the industries that have caused the need for a reduced interest rate in the first place (i.e. minerals and manufacturing centric towns).
The available responses to this cyclical condition are twofold:
1. Run for the hills, screaming Armageddon.
2. Respect the cycle, prepare for possible challenges and respond accordingly whilst maintaining a long term strategy.
It is always critical to remember the value of a long term property investment strategy. It is those who leave the market during hype that will not materialise their goals, while those that wait for the cycle to continue through the coming stages will reap the long-term benefits.
by Luke Graham