A closer look at the rental vacancy rate

Over the next couple of years, the expected gradual increase in the homeownership rate will reduce demand for single-family rental homes. But lower foreclosures will also cut the supply of those properties, leaving rental vacancy rates broadly unchanged. In the multifamily sector, rental demand is likely to increase thanks a rise in household formation. So even with the number of MF apartments set to rise, that means the vacancy rate will stay low, supporting rental growth. The demand for rental accommodation depends both on the total number of households being formed, and the share of new and existing households looking to rent. Other things equal, higher household formation will act to support rental demand, as will a drop in the homeownership rate. But the two sectors react differently to changes in those demand drivers. As homeownership is overwhelmingly concentrated in the SF sector, rental vacancy rates there are closely correlated to changes in the homeownership rate. In particular, the steady rise in the homeownership rate in the 10 years to 2005 was accompanied by a similar rise in the SF rental vacancy rate. By contrast, the relationship between homeownership and the MF sector is far weaker. Instead, the pace of household formation is the more important demand driver. That is likely to reflect the fact that new households tend to rent a home first, and therefore look to the MF sector.  Looking ahead, a gradual rise in the homeownership rate will act to cut demand for SF rental homes. But with foreclosures back to pre-crisis levels the upward pressure on the vacancy rate will be limited. The MF sector will benefit from a rise in household formation, although set against that a more recent rise in MF construction will boost supply. On balance, while the MF rental vacancy rate may see a marginal increase, a return to the pre-crisis level of 10% to 13% is not on the cards.