knowing the cycle, we look into the relationship between supply and demand, using a Blue Wealth pioneered metric that analyses the relationship between residential supply and vacancy rates. Without getting into the nitty gritty, this involves assessing the correlation between supply and vacancy rates, providing a dynamic metric that more directly measures how supply affects an investor’s cash flow through its relationship with vacancy rates. Results are as postulated: the correlation between supply and vacancy rates is positive. That is, as supply increases, vacancy rates have a tendency to also increase.
From a cash flow perspective, the more important metric for an investor is the speed at which supply is absorbed. Vacancy rates are a primary indicator of past and present demand for rental accommodation.
The peaks in the series, as one would expect, coincide with the introduction of new supply. As indicated by the ticks on the below graph, the market absorbs supply quickly. The combination of these two characteristics illustrates demand elasticity, meaning the suburb has high appeal to tenants and is significantly less likely than other areas to experience extensive periods of vacancy.
