Victoria's Land Tax Hike: What Property Investors Need to Know

In 2024, Victoria introduced a significant change in its land tax policy, primarily targeting property investors. As part of a broader fiscal response to address the COVID-19 debt levy, the Victorian government lowered the land tax threshold for investment properties, increasing annual costs for property owners. These changes have sparked considerable debate, particularly among property investors, who have been hit with higher costs and are rethinking their portfolios. The ripple effects of these tax adjustments are being felt across the housing market, with a notable increase in investor sales and a slowdown in new investment activity.

As an expert in property analysis and financial strategies, I will walk you through the top five themes emerging from these tax changes, focusing on how they impact property investors and the broader housing market in Victoria.

Increased Investor Selling Due to Higher Land Taxes

The most immediate and direct consequence of the new land tax thresholds has been an uptick in the number of property investors selling off their rental properties. The Victorian government’s decision to reduce the land tax threshold from $300,000 to $50,000 meant that many investors were now liable for higher annual costs. For instance, a property with an unimproved land value of $500,000 saw an increase of $1,175 in annual land tax. With nearly 500,000 investors affected by this change, it’s no surprise that many have opted to sell their properties rather than absorb the additional tax burden.

According to data from realestate.com.au, approximately 4,900 more investment properties have been sold in Victoria than would have been expected without the tax change. This represents a 2% increase in investor selling across the state. However, it’s important to note that while Victorian investors have been selling properties, similar trends have also been observed in New South Wales and Queensland, suggesting that broader market conditions are also playing a role in the increased sales activity.

Slower New Investment Activity in Victoria

Higher land taxes have not only prompted existing investors to sell, but they have also discouraged new investors from entering the market. Analysis shows that loans to investors for new or existing homes in Victoria were tracking at similar levels to those in Queensland before the tax changes. However, since the announcement of the land tax revisions, investor activity in Victoria has slowed significantly.

This trend has significant implications for the future supply of rental properties. Investors are essential for maintaining a healthy balance of housing stock, particularly in high-demand areas like Melbourne. With fewer investors purchasing properties, there is likely to be a reduction in the supply of rental homes, which could drive up rental prices further in the long term.

Rising Rental Prices in Melbourne

One of the more concerning outcomes of the increased land taxes has been the effect on rental prices. Over the past year, rents in Melbourne have surged by 9.5%, placing additional strain on renters already grappling with the high cost of living. The combination of higher investor costs and fewer new investors entering the market is exacerbating this trend, as reduced investor participation limits the availability of rental properties.

The impact of investor selling on renters is twofold. While some of the sold properties may be bought by first-home buyers, which slightly reduces rental demand, it also means that there is less rental stock available overall. This reduction in supply, coupled with steady demand, is likely to continue pushing rents higher in the coming years.

Positive Impacts for First-Home Buyers

Despite the challenges for property investors, the changes to Victoria’s land tax policy have presented some opportunities for first-home buyers. As investors retreat from the market, competition for properties in certain areas has diminished, making it slightly easier for first-home buyers to enter the market.

The reduction in investor demand has also contributed to slower price growth in Victoria compared to other states, which benefits first-home buyers by making housing slightly more affordable. This shift in the balance between investors and owner-occupiers is particularly evident in areas where investors have historically dominated, offering a rare window of opportunity for first-home buyers to get onto the property ladder.

Potential Long-Term Impacts on Housing Supply and Construction

While the current environment may be favourable for first-home buyers, the long-term implications of reduced investor activity could spell trouble for Victoria’s housing supply. Investors play a crucial role in supporting new housing construction, particularly in high-density projects that require substantial pre-sales to secure financing. With fewer investors in the market, the viability of many new construction projects is now in question.

This is especially concerning for Victoria’s future housing stock, as lower levels of new construction could lead to a dwelling shortage in the coming years. Such shortages would place upward pressure on both home prices and rental costs, potentially undoing any short-term gains in affordability that have resulted from the current market conditions.

Conclusion: What Should Investors Do Next?

The Victorian government’s decision to increase land taxes for property investors has set off a chain reaction in the real estate market. With nearly 5,000 additional properties sold and new investment activity slowing, it’s clear that investors are reassessing their portfolios in response to the higher costs. This has created opportunities for first-home buyers, but it also raises concerns about the long-term availability of rental properties and the potential for future housing shortages.

For property investors, these changes highlight the importance of having a flexible and adaptive investment strategy. Whether you’re considering selling, holding, or expanding your portfolio, now is the time to reassess your position in the market and ensure that your strategy is aligned with both current conditions and your long-term financial goals.

If you’re unsure about how to navigate these changes or want to optimize your property investment strategy in light of the evolving tax landscape, I can help. Reach out to me today for a personalized property investment strategy tailored to your goals. Let’s work together to ensure your investments remain profitable and resilient in a shifting market.