Victoria rising property taxes private rental housing sales loan
October 23, 2023
Victorian property investors selling up as rising rates and new taxes bite

Governments have long used taxes and tax breaks to create incentives or disincentives for investor behaviour.

Such incentives or barriers naturally distort the market they apply to and there is plenty of evidence to suggest that, particularly in the case of the Victorian property market, the investment disincentives have reached a toxic point.

Over a fairly short period of time and with little to no consultation with the industry, the Victorian state government has increased or greatly widened a series of property taxes which are already causing investors to sell up and look elsewhere.

An expanded and punitive 1% of property value “vacancy tax” that previously only applied to inner and middle ring suburbs was suddenly expanded to cover the whole state coming on top of Budget measures of a “temporary” COVID-19 repayment levy that will operate on top of current land tax bills for a whole decade and a new Airbnb tax that was unveiled as part of the government’s housing policy.

Rental properties already on sale

Taken together, the suite of new or widened taxes will hit many property investors in Victoria very hard and can be expected to result in a contraction in the number of people providing rental properties at a time when the rental market is already incredibly tight.

If the Victorian government wanted to reduce the supply of private rental housing it couldn’t have come up with a better plan and the response has been quite fast with the annual Property Investment Professionals of Australia survey finding Victoria has slumped from the second most popular state capital for landlords to second last place, just above Hobart.

That was before the expanded vacancy tax was announced, which hits any property owner who hasn’t either lived in a property for a month or had it rented for at least six months or more with a massive 1% tax slug on the value of the property.

The survey found that a quarter of Melbourne property investors sold at least one rental home in the past year, part of an estimated 217,000 investment homes that have been sold off nationwide in the past year.

More recent figures from CoreLogic found that the sale of investment properties in Sydney and Melbourne had accelerated.

In Melbourne, investors selling represented a staggering 60% of all sale listings, with the new taxes plus a lack of capital gains and higher holding costs cited as a reason for selling.

More sales of rental properties to come

Worse still, the PIPA thinks up to 38% of investors are planning to sell a home in the next 12 months — double the figure predicted in 2022 – as higher interest rates hit property owners particularly hard.

It is not only a Victorian problem given the extent of interest rate rises with only 55% of investors considering buying in the next year, down from 62% in 2021.

The survey of 1724 investors, which included 538 in Victoria, found increased property taxes were the biggest motivation to sell for investors and had been a factor in 47% of the sales nationwide.

Given most of the Victorian tax changes apply from January next year, the sales by investors can be expected to ramp up.

Other big factors causing the sale of rental properties included changes to tenancy legislation and rising loan repayment costs.

Australians paying a record amount of income in loan repayments

The Victorian tax changes are not the only bad news hitting property owners of all types, with the International Monetary Fund (IMF) finding that Australians devote a greater share of their income to mortgage repayments than any other advanced economy.

The reason behind that is that as a country, floating home loans that move upwards in line with rising interest rates predominate, while many overseas countries have long term fixed rates on home loans.

Unsurprisingly, the IMF downgraded its forecasts for the local economy and warned inflation will be higher than previously thought.

By December 2022, when the Reserve Bank had raised the cash rate to 3.1% following eight back-to-back rate rises, the share of household income devoted to paying debt had hit 15% – more than any other advanced economy included in the IMF analysis.

Since then, the cash rate has risen a further 1% to 4.1%, with the Reserve Bank saying it was keeping the rate lower than some other economies because of the way rises in the cash rate pass through more quickly to property owners in Australia.

The IMF now expects the Australian economy to expand by just 1.2% next year, down from its previous forecast of 1.7% and lower than predicted population growth.

The IMF also expects unemployment to rise to 4.3% from the current 3.7% due to slower growth, with headline inflation expected to average 4% next year, well above most other advanced countries.


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