What is the Vacancy Rate?
The vacancy rate is how many available dwellings are on the market for rent within a specified geographic region. The number is presented as a percentage and is often defined within a city, town, province, or state. Vacancy rates can also apply to commercial/office space (storefronts or high-rise) and reflect how much space is available for businesses to rent.
The vacancy rate can drive up the amount that landlords and rental agencies charge per month, as well as spur new construction throughout the region and drive urban and suburban growth. Vacancy rates can also be misleading, as we will discuss below, and can artificially drive up rental costs and create the illusion of unavailable units.
Canada Mortgage and Housing Corporation: Residential Vacancy Rates in British Columbia
The Canada Mortgage and Housing Corporation (CMHC) is a crown corporation that measures the availability of rental housing across different regions. For the purposes of our discussion, we can see below a charting of the vacancy rates throughout the lower mainland of British Columbia, Canada. What we can notice here is consistently low availability of rental housing over the last four years, with vacancy rates often hovering around 1% in all cities except Kelowna.
The low vacancy rate tends to reflect the difficulty in finding new housing for renters and is fueling the current condo boom throughout the lower mainland. Often in Canada, when new condos are built, many of the condo owners will, in fact, become landlords that, in turn, rent out their unit(s) to individuals looking for rental housing.
The Empty Homes Conundrum
The low vacancy rates seen above seem to indicate a strong demand for new builds in the Greater Vancouver Area. It is largely true in a city that is seeing a substantial population and economic growth. However, an important part of the discussion is the empty homes issue that’s been a contributing factor to the low rate historically.
Increasingly, non-local buyers will purchase a condo and leave the unit vacant. It results in new buildings that are 100% sold but sparsely occupied. Thus, artificially deflating the vacancy rate when the homes are not rented out or lived in by the owner. By the very nature of the empty unit, the buyers are not concerned with collecting monthly rental income.
Real estate purchases offer a secure asset in a country with a strong legal system. Thus, the allure of such a type of stable asset in a country, such as Canada, Australia, or the United States, stimulates new builds but does nothing to alleviate the low vacancy rate and provide supply for would-be renters. In order to address the issue, cities like Vancouver impose an empty homes tax, and countries like New Zealand prohibit non-resident ownership altogether.
Vacancy Rates for Consumers and Investors
A simple number like the vacancy rate can result in a wide-reaching impact on both consumers and real estate investors. The housing crisis facing many large cities, caused in part by the low vacancy rates, is multifaceted.
The cost of home rentals to median income is exceptionally high in cities like Vancouver, and although the government is continuously working to bring more affordable home vacancies onto the market, affordable rental housing is still an ongoing issue. Achieving an optimal vacancy rate is important to ensure adequate supply and increase competition among landlords for renter money.
Accurate quantitative modeling can be an effective tool in discovering the optimal rate to create stability between rental supply and pricing. The skill-based foundation to build such a model can be developed here at CFI.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: