What the rental vacancy rate says about our changing housing markets

The shift in Australian housing markets is well documented, in prices and the factors that influence them. Sydney and Melbourne have gone from unprecedented growth levels to leading a downturn.

Meanwhile, smaller markets are experiencing a softer landing, and Perth shows signs of recovery.

But we’re also witnessing changing dynamics for tenants and landlords. Canberra is now the most expensive city for rent, and median Sydney asking rents have fallen for the first time in over 12 years.  

One indicator that takes us behind the scenes of these changes is the rental vacancy rate. It is an insightful, high frequency indicator of demand and supply in rental properties.

What is the rental vacancy rate?

The rental vacancy rate, expressed as a percentage, indicates how many places are empty and available for rent out of all the rental stock in an area.

The rental vacancy rate is an important indicator for the bargaining power of renters or landlords alike. A high or rising vacancy rate generally means tenants are in a more favourable position, whereas landlords may have the upper hand when it starts to fall.

The Domain rental vacancy rate is reported as a monthly snapshot at the capital city metropolitan level. (For more on how the rental vacancy rate is calculated, click here.)

Rental vacancy rates across Australia

Current vacancy trends across the capitals show us which way the scales are tipping in:

Sydney and Melbourne
Hobart
Canberra
Perth, Brisbane, Adelaide & Darwin 

A tenants’ market in Sydney and Melbourne

Rental vacancy rate in Sydney

The Sydney rental vacancy rate has been trending higher. In January 2019, the rate was 2.8 per cent, up from 1.8 per cent in the previous year.

The January result is down from the previous month (3.5 per cent), because December usually sees a strong seasonal increase in the number of rental listings.

This overall upward trend is good news for tenants, because rising vacancy rates generally indicate that rents will not grow as quickly, and they may even drop.

Higher vacancy rates generally mean the number of vacant rentals is going up. Domain estimates that the total vacancies across Sydney in January 2019 were approximately 17,500. This is 6500 more than were available for rent in January 2018.

Rental vacancy rate in Melbourne

The Melbourne vacancy rate has also risen over the year, but to a lesser extent – from 1.4 per cent to 1.8 per cent.

There were approximately 2000 extra rental listings available across the metropolitan area on the previous year.

The more properties there are available for rent, the more competitive a landlord has to be to attract tenants. This may lead to lower advertised rents, or tenants negotiating lower rents.

The relationship between the rental vacancy rate and rent prices is further demonstrated in the graphs below. The graph shows an inverse relationship between rental vacancies and rent inflation. As the supply of vacant rentals increases, growth in the dollar value of rent declines.

This has already been seen in the latest Domain Rental Report, where Sydney median asking rents for houses fell from $550 per week to $540 per week in the year to December.

So where have these extra rentals come from? One answer is that high levels of property investment during the housing boom period created an abundance of rental supply.

ABS lending and housing finance data suggests that investors, who generally buy their properties to rent out, made a higher portion of the market over the boom period between 2012 and 2017.

In NSW, investors averaged 54 per cent of the value of mortgages lent over this time, compared with a long-run average of 42 per cent. In Victoria, 46 per cent of mortgage lending went to investors during the boom, compared with a long-run average of 36 per cent.

The latest building activity data showed that between 2012 and 2017, there were more than 280,000 dwellings delivered across NSW, and about 340,000 dwellings delivered across Victoria.

Crisis point in Hobart

Rental vacancy rate in Hobart

Hobart has an extremely tight rental market, in a city with only about one per cent of of Australian rental stock to begin with.

The rental vacancy rate in Hobart was 0.4 per cent in January, which is steady on the previous year. Domain estimates there were just 100 rental vacancies across the city in January.

The supply of new housing in Hobart has been subdued relative to population growth in the state. ABS migration data suggests the number of migrants entering Tasmania from other states and overseas rose 25 per cent. Despite this, dwelling completions actually declined 15 per cent across the state over the same period.

Tasmania has also seen a significant lift in tourism as a result of a relatively low Australian dollar. A visit from Xi Jinping in 2014 also raised the profile of Hobart as a destination among Chinese tourists.

The lack of development, and increased use of Airbnb in Hobart, has kept the Hobart rental vacancy rate the lowest of the capital cities.

This in turn, is putting pressure on rents. Domain data shows house rents increased 6.3 per cent over 2018 to $420. Units had a significant 11.8 per cent increase to $380.

Vacancies remain low in the capital

Rental vacancy rate in Canberra

The rental vacancy rate in the ACT for January was one per cent – the second lowest of the major metropolitans. The vacancy rates increased slightly over the year, from 0.9 per cent in January of the previous year.

It is estimated there are roughly 500 vacant rental properties across the ACT market, down from a seasonal spike of 740 in the previous month.

The tight vacancy rate in the capital is reflected in rents, which are the highest of the capital cities for both houses and units. Domain data shows Canberra house rents are at $560 a week, while unit rents are $465.

Despite the low vacancy rate, the 2019 figure is an increase from 0.9 per cent in January of the previous year.

Rebound in Perth, Brisbane and Adelaide

Landlords across Perth, Brisbane and Adelaide will be pleased to know that vacancy rates are steadily trending down.

Tightening rental markets typically foreshadows rent increases.

Rental vacancy rate in Perth

Perth had the sharpest decline in the rental vacancies across the capitals, from 4.1 per cent to 2.9 per cent in January 2019. Following the significant impact of the mining downturn, a tightening vacancy rate is yet another sign of price and rent recovery for the Perth property market.

Rental vacancy rate in Brisbane

In south-east Queensland, there have also been signs of increased demand, driven by migration in pursuit of a laid-back lifestyle and relative property affordability.

This is reflected in the decline of the Brisbane vacancy rate.

The rate was 2.6 per cent in January 2019, down from 3.1 per cent in the same month of the previous year.

As vacancy rates trend down, and the supply of available rentals tightens, weekly house rents have risen 2.5 per cent in the year to December while unit rents are up 2.7 per cent.

Rental vacancy rate in Adelaide

In Adelaide, the January 2019 vacancy rate was 1.1 per cent, down from 1.2 per cent in the same month of the previous year.

This corresponds with an increase in rents and sale prices across the Adelaide market, where house median asking rents are up 2.7 per cent to $380 per week, and a significant 5.1 per cent in units over the year, with the median asking rent at $310 per week.

Rental vacancy rate in Darwin

The exception to the resource city recovery is Darwin, where a lack of projects have resulted in slowed migration, and subsequent demand for rentals. The rental vacancy rate has risen to 4.7 per cent in January 2019, from 3.6 per cent in January 2018.

How is the rental vacancy rate calculated?

Domain’s rental vacancy rate is calculated by dividing the estimated number of vacant rental properties by the total estimated rental stock.

The formula is as follows:

Estimate of empty, available rental properties

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Estimate of total rental stock

Estimate of empty, available rental properties:

An estimate of available, vacant rentals (the numerator) is based on adjusted Domain listings. Any rental listing that has been on the market for more than 21 days is considered empty.

Number of days:

The number of days used is 21, because it is the notice period for tenants vacating a rental in most (but not all) states and territories. This means that if a rental listing has been advertised for more than 21 days, it is almost certainly vacant.

Estimate of total rental stock:

The estimate of total rental stock (the denominator) is adjusted ABS census data. The 2016 census provided the latest insight into how many rental properties there were on census night.

Where the tenure of a dwelling is not reported on census night, it is assumed the rental stock in non-reported properties is the same as the portion in reported properties.

That count of rental properties is then adjusted for what the number is likely to be today, using forecasting and interpolation.