Analyzing Real Estate Vacancy Rates

September 10, 2018

September 10, 2018

Timing the market is not an easy undertaking. Understanding which phase we are in and what metrics play a significant role in market shifts. An integral process to bring clarity to housing cycles is understanding the economic fundamentals including both macro and micro to achieve a more complete picture of where housing stands and where it is shifting. Some of the metrics that I would recommend examining include: occupancy rates, vacancy and inventory rates, sales to listing ratios, housing starts, building permits, completions, and absorptions.

We have compiled our own vacancy rate data courtesy of a several raw data sets from Canada Mortgage Housing Corporation (CMHC). We wanted to get a visual understanding of how vacancy rates are trending from city to city in a visual format. We have made some of our findings public in the following link: https://goo.gl/qoeagy

We tend to produce our own data analysis as opposed to relying solely on the material published in the media. As part of our “Real Estate Top Performers” mastermind group, you can find other data visualizations links by joining our group – https://www.linkedin.com/groups/8677437

Real estate moves through a predictable four-stage cycle. Occupancy rates are a key indicator of where we are at in the housing cycle stages. Other indicators like rent prices are simply by-products – they are the effect, not the cause. Occupancy tends to be the main driver behind the cycle.

You may be thinking what to look for and how to monitor occupancy in terms of rents and sales. Higher occupancy equates to higher rents. If you’re an investor in apartments, you are looking for the vacancy rate and which way it’s moving. If it’s going down, this likely indicates the second phase.

The single-family home equivalent is full inventory (how many homes for sale), days on market (how long is a home for sale before contract), and a month’s inventory (if no more homes went on the market, how long the current inventory would last at the current absorption rate).

Timing the market is difficult, but in general you want to enter that second phase after the recession, when there is higher than average occupancy and price appreciation.

Many people tend to have the Vancouver housing market wrong concerning where we are in the cycle. It’s not surprising that economists get it wrong; the market proves them wrong in many cases. They’re not wrong about the cycle, but maybe about where we are and how long we’ll be there. The increase and decrease in occupancy and driver of rent growth is largely due to new supply – which can get offset by unexpected demand changes and government policy that restrict supply.

Vancouver has a relatively low 0.9% vacancy rate, with rents averaging at $1,552. Meanwhile, Calgary’s vacancy rate for a 2-bedroom apartment is relatively high at 6.3% even though it’s been dubbed as the next real estate market waiting to bloom. For condominium properties, the vacancy rates for both Toronto and Vancouver remain low at 0.7% and 0.6%. Despite a 3.8% vacancy rate in Calgary for a 2-bedroom condominium, many are optimistic that housing behaviour will improve as residential units are made available for rent.

When reviewing residential vacancy rates, it is important to look at a longer-term trend and compare that trend to comparable cities. Avoid media publications embellishing real estate trends with titles like, “Vacancy Rates Have Plummeted.” Look beyond the news and take some time to analyze the data yourself to understand the numbers in relative terms. Join our Linkedin Group (https://www.linkedin.com/groups/8677437) to dig deeper and share insights on market movements as well as general best practices in real estate.