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Victoria’s Vacancy Rate Mixed Bag

Victoria’s Vacancy Rate Mixed Bag
October 21, 2019 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Vacancy rates are one of those funny metrics which are either ignored or given too much credence if you ask me.

When vacancy rates are tight, which is generally below two per cent, we usually start to see rents increase because of more demand from tenants than supply of rental dwellings.

On the other hand, when rates are too high, rents start falling – in recent years, this has been especially the case in capital city locations prone to oversupply of new units.

Truth be known, every location will go through periods of high and low vacancy rates. But the vacancy trends don’t always correlate with property price trends.

In this report, I’ve analysed the entire state of Victoria. The diversity in vacancy rate results across the state seem like a mixed bag of lollies, with some results sweeter than others.

Over the past two years, vacancy rates in parts of Victoria have tightened, but in others they have started to increase.

Melbourne Rates Rise

In Melbourne specifically, I believe its rental market is generally balanced. There is however, variances from one part of Melbourne to another.

As at August 2019, Greater-Melbourne had 11,830 properties advertised for rent – a vacancy rate of two per cent, up from 1.6 per cent two years earlier.

As you no doubt know, over the past five years, median house prices increased in Melbourne, but that situation spurred something else into action which is likely to impact its market over the short- to medium-term.

That something is supply – too much of it.

In fact, Propertyology analysis of leading indicators for future housing supply confirms that there are still parts of Melbourne with supply pipelines that are larger than what we feel demand will absorb, particularly for apartments.

In addition to building a record high volume of new dwellings, during Melbourne’s property boom [ended November 2017], a significantly high portion of real estate transactions were by investors. That means Melbourne’s rental stock has received a big boost of supply.

Unfortunately, for anyone who bought some of this inferior investor apartment stock, the abundance of choice within the hundreds of same-same Lego buildings is likely to result in depressed rental yields and grossly underachieving capital growth.

Melbourne’s inner-east is one of several examples where the supply pipeline remains unsustainability high.

While the median house price for Greater-Melbourne increased by 96 per cent over the 10 years ending June 2019, apartments in numerous suburbs across Melbourne saw less than half of that rate of growth.

Related article: Suburb-by-suburb apartment performance, last 10-years

Regional Vacancy Rates

The story is reversed in many Victorian regional areas, where rental vacancy rates have fallen over the past two years and some promising property price growth occurred.

Major regional areas such as Bairnsdale, Bendigo, Shepparton, and Warrnambool have already seen some steady property price growth in recent years and their vacancy rates are still tightening.

Related article: Seven great cities set for transformation

In essence, while Melbourne was the focus for developers over recent years, several regional locations – many which boast diverse economies plus more affordable housing – were left to their own devices.

Additional pressure on housing demand has been created in many of these regional locations through internal migration increases.

Related article: Australia’s population winners and losers

The biproduct of these forces today is that supply of property – both for rent and for sale – has tightened.

In fact, several of Victoria’s regional locations have lower rental vacancy rates than Sydney (3.4 per cent), Darwin and Perth (both 2.9 per cent), and Brisbane (2.5 per cent).

What Happens Next?

After a circa 15 per cent reduction in median house prices over the last two years, there has been a rebound in Melbourne property prices over the last couple of months. Obviously, this is good news.

However, with the RBA cash rate now in unchartered territory, it is vital for investors to distinguish the difference between growth caused by an interest rate sugar-fix (part of the RBA’s intentions) and sustainable growth because of solid fundamentals and market cycles.

In Melbourne’s case, I believe it’s the former. Beware the sugar-fix!

On the other hand, a number of Victorian regional locations have more protein in their real estate diet than sugar. Their energy supply looks more sustainable to me.

Not only do they offer more affordable price points and better vacancy rates, low interest rates mean that the annual holding cost for investors will be next to nothing – or even be positive cash flow from day one – with a price upswing on the cards as well.

In my experience, those regional locations that have better capital growth prospects than the locations which have already been through a significant growth in recent years.

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