The rental crisis, which is bad news for renters and investors, has just hit a new low – and Victoria is the test case in how bad it can get.

You might think rental vacancy rates hitting 1.01 per cent would mean investors are making money hand over fist.

Well, if that’s the case … why are they quitting the market?

Let’s just look at Victoria, where the exit of investors is at its most extreme and the state government is being branded anti-­investor after hitting the sector with two rounds of tax within six months.

At face value, Melbourne should be the city of choice for ­investors.

In fact, the last CBA state of the state survey confirmed that Victoria is, in fact, the boom state.

“Strong economic activity, solid retail spending and business investment has catapulted Victoria from sixth place to the number one spot today with the highest population growth in seven years,” the report says.

But there’s a problem. Property investors in every state are facing substantially higher rates, but investors in Victoria are also facing substantially higher taxes.

The state government started with a batch of new taxes in its May budget that covered everything from property development windfalls to short-term rentals where an “Airbnb tax” was introduced at 7.5 per cent of annual ­revenue.

Then just as the property sector was trying to digest these changes, Victorian Treasurer Tim Pallas announced a few more tax moves for good measure. In October, the government announced it would widen a vacant residential land tax (that included holiday homes) from a handful of inner-city suburbs to include the entire state.

Victoria is now beyond doubt the state with the sharpest tax regime. At one stage last year it looked like Queensland might rival it, when the Palaszczuk government briefly toyed with a ­bizarre land tax move that would have taxed investors in other states that held Queensland property. Eventually, that idea was scrapped.

But in Victoria, the state government appears to have little interest in looking at the rental market in a wholistic manner – the bulk of the recent legislative action is aimed at property owners. Indeed, the Real Estate Institute of Victoria estimates that one in four property holders in Victoria sold in the last year. “Investors are fleeing,” institute chief executive Quentin Kilian says. 

Investors selling up

Nationwide, a survey from the Property Investment Professionals of Australia in September found that the number of net individual investors in the market has almost halved since 2015 to be under 30,000.

As Nicola McDougall, the chair of PIPA, says: “The people who supply the majority of rental homes are selling up in droves.”

Is it that bad? Across the market, landlords are selling – and they are selling more in Victoria. A closer look at the number also shows that when investors sell, increasingly they are not selling to other investors. This does not mean there is an automatic move of former tenants into the market. But the PIPA survey suggests that only about one in three sales are to first-home buyers.

Ultimately, it means there is less rental stock on the market. The double whammy of higher rates and more taxes – not to mention increasingly tight tenancy regulations – is clearly spurring an exit, though the numbers have yet to be clarified beyond doubt.

While the percentage of sellers represented by property owners is rising, Eliza Owen of property research group CoreLogic says she has yet to see hard evidence that investors are leaving the market “in droves”.

Either way, the spike in property owners quitting suggests that private property investors are finding it all too much – rising rates are the key driver and rising taxes and regulations at a state level, especially in Victoria, top it off.

WA tries something

On the “supply” side, building ­approvals numbers constantly disappoint, while on the “demand” side, record immigration levels ­ensure the drivers of the market remain in place.

On a recent Money Puzzle podcast, Stuart Wemyss of the Pro­Solution group gamely suggested that the federal Treasury could ­improve the market by offering new Capital Gains Tax concessions to property owners. To howls of derision from many observers, Wemyss specifically suggested that in order to lure investors back into the market there could be an arrangement where people could make super contributions rather than pay tax. Such a scheme already exists for small business owners.

It may seem extreme, but the overall situation is extreme.

Consider this: a survey this week from the Flatmates group looked at the availability of rental rooms in Sydney suburbs. In five inner-city suburbs, where there was a total of 1081 people looking to rent, the number of rental ­vacancies was exactly zero.

And so, all ideas are worth considering.

In the UK the conservative Sunak government has run a program where homeowners are allowed to rent out a room earning up to $15,462 a year tax-free for taking in lodgers.

There are an estimated 12 million spare rooms in Australia: at the same time, there is a lot of people looking for income and a lot of people looking to rent.

In Australia, this is going to take off in the coming months as a generation that went back home during lockdowns now look for their own lodgings. Of course, in the real world a lot of people taking in lodgers are not excited about a tax break because they charge cash and the entire arrangement is off the books.

Needless to say, they don’t provide statistics for this sector.

Nonetheless, the point is that changes can be made to the tax system on both sides – property owner and tenant – that can improve the overall outcome.

As Victoria’s Labor government piles on the tax, the West Australian Labor government is showing considerably more innovation by taking an experimental approach that might yield some interesting outcomes.

Perth, like all the major cities, has very little available to rent – total rental listings in the city are down 8 per cent year on year (Bad, but nothing as bad as Victoria, which is down 20 per cent).

Earlier this week WA’s Cook government announced an emergency fund for tenants in extreme situations such as those facing eviction. On the other side of the ledger, they are offering direct grants to property owners who take their properties off the short-term “Airbnb” market and put them back into the mainstream to be offered for rent on an annual basis.

This is a crisis that is going to last for years: renters are losing and investors are not winning. There are long-term solutions – loosening regulations, lower interest rates – that will take years and there is no sign of them happening at all just now.

There are also short-term fixes – encouraging the taking in of paying lodgers, incentivising landlords to quit Airbnb and placing their housing stock back on the market, perhaps even CGT changes. Everything should be on the table.

Originally Published: James Kirby | The Mercury | 10 November 2023

https://www.themercury.com.au/business/victoria-a-test-case-when-property-taxes-rise-rapidly/news-story/928825abb87fbf748ab986d7d9d6db6c?btr=ab9efd94b13a3243f2841ab73695c7af

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