Which data is more important? Vacancy rate, unemployment or demographics?

September 17, 2018
Houses in Australian street

Investment property decisions should be based on solid research data. Three important issues to consider for any potential investment property location are tenant vacancy rates, unemployment statistics, and demographic information.

But is one of these factors more important than the others? Before answering that question, let’s look at why each of them is important.

Houses in Australian streetTenant vacancy rates

Vacancy rates are a great indicator of the level of tenant demand in a particular suburb.  Investment properties in good locations have low vacancy rates, and vice versa.

Put simply, every week that your investment property is vacant costs you money. And the more desirable your investment property’s location, the more rent you’ll be able to charge your tenants. Low vacancy rates will also help your capital growth prospects over time.

Desirable locations usually have most (or all) of the following characteristics:

  • A good public perception
  • Close to good schools
  • Good shopping facilities
  • Close to the CBD
  • Good public transport facilities
  • Plenty of things for people to do on the weekend (like restaurants, cafes, entertainment venues, parks etc.)

Tenants will often pay a premium to rent in areas that offer these characteristics.

Unemployment statistics

Areas that have low unemployment rates also tend to be in high demand, which is great for maximising the rental yield and capital growth prospects for investment properties in those locations.

Person researching investment propertiesHigh unemployment rates can have the opposite effect. You may find it harder to attract quality tenants if you buy an investment property in these areas, and even if you do, they may struggle to pay their rent if they become unemployed themselves. You’re also more likely to have a higher turnover of tenants.

Demographic information

Real estate demographics are statistics that describe the characteristics of people,  households and dwellings in a particular location. This information is freely available online and can be compiled from a number of sources, including real estate websites and the Australian Bureau of Statistics.  For example:

  • The average age and income levels of a suburb’s residents
  • The population of the suburb (including growth rates over time)
  • The proportion of residents that are employed in broad categories (e.g. white-collar workers versus trade-related occupations)
  • The average number of people per household
  • The proportion of residents that are renting versus buying versus owning
  • The average prices for houses, townhouses or units/apartments in the area (including growth rates over time)
  • The proportion of houses, townhouses, and units/apartments

All of this information can be useful for determining the type of tenant that will potentially be attracted to an investment property in a particular location.

Which data is more important?

There is no definitive answer to this question. It depends on the market conditions of the location and how likely they are to change over time. For example, high vacancy and unemployment rates in an area can change fairly quickly if infrastructure like roads or commercial buildings are currently being built that will generate jobs. This type of infrastructure can also change the demographic profile of a suburb over time.

Aerial view of Australian suburbLow vacancy rates can also be affected by the level of building development that’s currently occurring in an area. For example, new unit developments that are currently being built will increase the range of options that potential tenants have when they are completed. That can push up vacancy rates in a suburb. Older suburbs can also have their demographic profiles changed over time if their neighbourhoods are upgraded with other new facilities that attract more affluent residents.

The bottom line is to do your location research as thoroughly as possible, so that you can make the most informed decision about where to buy an investment property. That includes checking with the local council about future zoning regulations and planned developments that could impact the potential returns on investment properties in a particular location.

 

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