The tax is charged at 1% of the total value of the property and is currently only applied to existing residential properties located in the inner and middle rings of Melbourne which have been vacant for 6 months or more.
Under the newly announced plans, the same land tax will be applied to all land and property within the entire state commencing from 1 January 2025.
Another tax will also be introduced on vacant residential land that has been unimproved for five years or more in established areas of metropolitan Melbourne from 1 January 2026.
The VIC government estimates that around 600-700 extra homes will be affected by the expansion of the tax, generating about $6m in revenue annually.
A single-family holiday home will be exempt from the changes.
Meanwhile, the tax expansion will also apply to around 3,000 undeveloped properties.
Victorian Treasurer Tim Pallas said the changes were aimed at encouraging landowners to develop vacant property rather than just holding it.
“We can’t afford to have vacant land in metropolitan Melbourne sitting idle for year on year and our clear message to landowners is to either develop the land or sell it to someone who will,” he said.
The new rules will apply to the government as well, citing some exceptions such as easements for future roads and public transport.
“We expect every government agency that is holding land to justify exactly why they’re holding it and not putting it into the marketplace,” he said.
In short, no it won’t help solve Australia’s housing supply crisis.
It might help to free up a few properties, but it’ll be a drop in the ocean of what is needed to help boost enough supply.
Tax expansion plans also don’t take into consideration many other headwinds facing developers and the construction industry, which will be targeted most under this new plan.
It’s not really taking into consideration why some sites aren’t being developed. Some people may be land banking, but there are also high construction costs and labour shortages at the moment.
- Cameron Kusher, director of economic research at PropTrack told realestate.com.au.
Interest rates are the highest they’ve been in a decade, so getting the level of pre-sales that you need to get construction underway can be more difficult at the moment.
It will probably help get a little more stock to the market sooner than it would have otherwise, but it’s not a silver bullet to fix the undersupply of housing in Victoria.
There is already a flurry of property investors selling up, driven by one key thing: housing affordability.
On top of interest rates, robust property prices and increased government intervention, land tax increases will only drive investors away from the property market.
Increasing costs isn’t a move supportive of attracting more private property investors to supply rental accommodation.
Land tax increases mean that many investors feel they can no longer afford an investment property in addition to their residence.
This is particularly the case in Victoria, which has the highest percentage of investment property sales, where the state government will slash the tax-free threshold for land tax on investment and second properties to $50,000, from $300,000, in an effort to rebalance the market.
And Victorian Shadow Minister for Home Ownership and Housing Affordability, Evan Mulholland, said new taxes on property would also only push the dream of home ownership further out of reach for many Victorians.
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Ever-increasing taxes will do nothing but drive critical investment and housing supply interstate. Instead of placing additional costs on property, the Labor Government should be reducing taxes to make homes more affordable.
- he said.
The truth, unfortunately, is that there is no easy fix for Australia’s supply crisis.
The only way to increase the supply of rental properties is to encourage more private investors into the market.
There are two things that governments can do to achieve that.
Firstly, make sure rental laws are balanced by providing enough protection for renters whilst still giving landlords enough control over their valuable assets.
Secondly, we need to improve borrowing capacity.
For example, lenders test a borrower’s ability to service a loan at 3% above current rates, which means interest-only investment loans are being tested at a rate of 8.70% p.a.
That means that, for example, principal and interest on a 25-year loan will see repayments on a $1m investment loan at around $94,000 p.a. – almost double actual repayments ($56,000 p.a.).
In my view, the 3% buffer is no longer necessary if we are close to the top of the interest rate cycle so the benchmark interest rate needs to be reduced.
I see a window of opportunity for property investors with a long-term focus right now.
You see…we are at the beginning of a new property cycle, something that doesn’t happen very often.
Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom which occurred in early 2023.
But if the market hands you an opportunity like this, why not take advantage of it?
Taking advantage of the upturn stage of a new property has created significant wealth for investors in the past.
Moving forward, demand is going to outstrip supply for some time to come as we experience record levels of immigration at a time when we’re not building anywhere as many properties as we require.
Of course, in due course, consumer sentiment will rebound when it becomes clear that inflation continues to fall and interest rates have peaked.
At that time, pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
And strategic investors will take advantage of the opportunities our property markets offer over the next couple of years maximising their upsides while protecting their downsides.
While it might feel counterintuitive to buy at a time when there are so many mixed messages in the media, you can benefit from less competition, low consumer sentiment, minimal downside risk and minimal risk of oversupply.
And you can be part of the solution to our supply crisis at the same time.