There is little doubt that Victoria is Australia’s most financially challenged state.
While Tasmania could mount a challenge with its small population and expensive ferries and AFL stadium fiascos, Victoria’s rash of over-budget big builds and Covid spending that has its debt projected to reach $194 billion by 2029 still takes a very dubious first prize.
It is deeply ironic then, that the Victorian government’s desperation for more revenue which led to an unprecedented ten-year “temporary” increase in land tax to pay for Covid expenses may have accidentally exposed the key to fixing Australia’s housing affordability crisis.
Land Tax Improves Affordability
Coinciding with a massive broadening of the land tax base that hit housing landlords particularly hard, the results are that Melbourne has become close to Australia’s most affordable capital city.
Once second only to Sydney for expensive real estate, the higher costs for landlords have seen smaller capitals such as Brisbane, Perth, Adelaide, and a booming Darwin race ahead.
With the median house price in Melbourne now about $980,000 – $600,000 behind Sydney – the gap between the two most populous cities has not been this wide since 1999, according to Cotality figures.
Cotality puts the blame for Melbourne’s underperformance partly on land tax hikes, which have increased the cost of holding an investment property with a land value of $650,000 by $1,300 a year.
Tightening tenancy laws that go some way to redressing the imbalance for tenants have also added to landlord costs.
Another factor is Melbourne’s greater supply of low-cost apartments, which has dragged down the averages and met some of the demand that would otherwise have caused prices to spike like in the other capital cities.
Great for First Home Buyers
The results are disappointing for existing Melbourne home owners – particularly those wanting to move interstate – but they have led to Melbourne now running well above the national average for new loans taken out by first-home buyers.
That’s not a bad unexpected benefit when you look at the big issues of housing availability, generational inequity and the ability of younger generations to get on to the property ladder.
There are now some indications that the five years of softer growth in Melbourne are coming to an end as property price growth resumes but for now Melbourne’s status as a relatively affordable oasis in the middle of an escalating price bubble is still intact.
Price growth in the last quarter was stronger and pundits say a moderate price recovery is in prospect but there may be some other policy consequences flowing from Victoria’s accidental property experiment.
Increased Capital Gains Taxes?
Federal Treasurer Jim Chalmers and Prime Minister Anthony Albanese have been looking at some big changes in the tax treatment of capital gains and negative gearing for the upcoming May 12 Federal Budget and you can be sure they have been monitoring the Victorian measures to see which way the wind is blowing.
Historically, any measures that might cause home prices to fall have been treated like electoral poison because of the number of potential angry voters they would create but that situation might be changing.
Even wealthy home owning parents are now despairing about their children buying a home and the prospect of joining the ranks of the "bank of mum and dad".
Victoria’s accidental experiment might give the Federal Labor government some confidence about unwinding some of the concessional tax treatment of housing capital gains.
We’ll just have to wait until the Federal Budget in May to see if it has given them some courage when it comes to potentially increasing the tax applicable to the sale of rental properties.
