Key takeaways
For the first time since records began in 1999, Victoria’s active rental bonds dropped by 21,712 over the 12 months to June 2024. This marks a reduction of over 20,000 rental properties, signaling a significant shift in the state’s rental market.
Victoria’s high property taxes and stricter rental property standards have made owning investment properties less attractive. These factors, combined with sustained higher interest rates, have driven many landlords to sell off their properties.
Melbourne’s metro areas have experienced the largest declines, with more than 20,000 fewer rental properties, a 3.7% year-on-year decrease. In contrast, regional Victoria saw a smaller drop of around 1,000 properties. Melton was the only LGA in Melbourne to see an increase in rental bonds, driven by new developments.
Every Melbourne LGA saw rental prices rise in the past year, with some regions experiencing increases of nearly 20%. Despite a slowdown in price growth in the recent quarter, rents are still 7.5% higher than a year ago, creating affordability challenges for tenants.
With many investors selling their properties, first-home buyers have seized the opportunity. Victoria currently leads the nation in first-home buyer activity, accounting for 32% of new loans. However, this does not alleviate the long-term issue of declining rental stock.
Victoria’s population is projected to grow significantly over the next five years, further increasing demand for rental properties. The shrinking rental market, combined with rising construction costs and fewer new developments, could exacerbate housing affordability issues for both renters and buyers.
Victoria’s rental market has reached an unprecedented milestone, with new data released by the Department of Families, Fairness and Housing showing that the rate of investors selling their investment properties is rising.
They looked at the amount of rental bonds (a proxy for the number of rental properties in a market)) which indicates there are 21,700 fewer rentals.
For the first time since records began in 1999, Victoria has seen a decrease in the number of properties leased, declining from 676,400 in June last year to 654,700 in June this year.
The speed of rental stock loss also appeared to be increasing, with the total number of rental bonds dropping 1.3 per cent in the three months to May, and 3.2 per cent in the three months to June.
This has sparked concerns about the sustainability of the state’s rental market in Melbourne.
So, what’s driving this sudden exodus of rental properties, and how does it impact both investors and tenants?
Property taxes and regulatory pressures are driving investors away
The surge in investor exits is largely tied to Victoria’s current tax policies and tightening regulatory standards.As the state with the highest property taxes in Australia, Victoria has introduced a range of measures that have made owning a rental property less appealing.
In the 2023 budget, the government increased taxes on investment properties, adding to the strain already placed on landlords by rising interest rates and new minimum rental property standards.
Eleanor Creagh, Senior Economist at PropTrack, explains:
"Victoria’s increased property taxes, combined with the higher cost of maintaining a rental property under the new standards, have led many investors to reassess their portfolios.
This, coupled with sustained higher interest rates, has tipped the scales for a significant number of landlords who have opted to sell."
This exodus of investors is clearly reflected in the data, which shows a correlation between the decline in rental bonds and increased investor sales.
In a typical year, Victoria registers an increase of approximately 20,000 new rental bonds.
However, this year, the drop suggests that up to 70,000 investors may have sold their properties, a figure that includes an additional 40,000 sales compared to an average year.
Melbourne hit the hardest, while outer regions showed resilience
Unsurprisingly, the bulk of this decline has occurred in Melbourne, with the metro area losing more than 20,000 rental properties, representing a 3.7% year-on-year decrease.
In contrast, regional Victoria has fared better, seeing a relatively small decline of around 1,000 properties.
Interestingly, every Melbourne local government area (LGA) except Melton has experienced a reduction in active rental bonds.
The hardest-hit areas include Nillumbik, Port Phillip, Manningham, and Monash.
Melton, a burgeoning suburb in the city’s outer west, has managed to buck the trend due to its rapid growth and large-scale new developments.
According to Creagh, Melton’s resilience can be attributed to its growth trajectory:
"Melton continues to attract new developments, which explains its increase in active rental bonds.
However, it’s an exception in an otherwise tight rental market across Melbourne’s metro regions."
Rental prices continue to soar amid declining stock
With fewer rental properties available, rental prices have surged across every Melbourne LGA over the last few years, with some areas experiencing rent increases of nearly 20% over the past year, but rental growth is now slowing.
Falling demand from reduced migration, increases in the average household size, and increased house completions appeared to be keeping a lid on rents.
While rental price growth has slowed somewhat in the most recent quarter, rents remain 7.5% higher than they were a year ago.
Despite this easing in growth, affordability is becoming a critical issue.
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As rents reach unsustainable levels, more tenants are seeking alternative living arrangements, such as moving into shared houses or returning to live with family.
Creagh notes:
"We are seeing rental affordability hitting a ceiling, with many tenants now being priced out of the market.
This is pushing them to seek cheaper options, which in turn reduces demand for new lettings."
The vacancy rate across Melbourne has dropped in tandem with the decline in rental bonds, tightening conditions even further.
Melton, the only LGA to see an increase in bonds, has also seen some relief in rental vacancies, but rents there have continued to rise, albeit at a slower pace than in other regions.
First-home buyers seizing the opportunity
Interestingly, the exodus of investors has created opportunities for first-home buyers, who have been quick to step into the market.
Victoria currently leads the nation in first-home buyer activity, accounting for 32% of all new loans.
Over the past year, 35,000 loans were made to first-home buyers, indicating that many are snapping up former rental properties.
However, Creagh warns that this shift doesn’t solve the underlying issue:
"While first-home buyers are stepping into the market, the overall supply of rental properties is shrinking.
This trend could exacerbate housing supply shortages, particularly in the rental sector, as the state’s population continues to grow."
As first-home buyers take up previously rented properties, the rental demand and supply are reduced simultaneously.
But with Victoria set to experience the fastest population growth in the country over the next five years, the withdrawal of investors from the rental market could create long-term challenges.
The long-term implications for Victoria’s property market
Although Melbourne remains one of the more affordable capital cities for renters, Victoria’s shrinking rental market raises serious concerns for the future.
With fewer investors entering the market and rental properties being sold off, the state’s housing supply is likely to face growing pressures.
This is particularly true in the multi-density housing sector, where investor pre-sales play a crucial role in financing new developments.
Adding to these challenges is the rising cost of construction, which has slowed new housing completions.
If investor interest continues to wane, development activity could be further constrained, leading to higher costs for both buyers and renters.
Creagh emphasizes the need for a balanced approach:
"Policymakers need to strike a balance between protecting tenants and encouraging investors to remain active in the market.
Without investor participation, the rental market risks becoming unsustainable, and the flow-on effects will be felt by both renters and future buyers."
Final thoughts
Victoria’s rental market is in a state of flux.
Investors are retreating, rental prices are rising, and the number of available rental properties is shrinking.
At the same time, first-home buyers are capitalizing on the opportunity to enter the market, but this isn’t enough to counterbalance the broader issues facing the rental sector.
As population growth continues and demand for housing rises, the state’s ability to provide sufficient rental stock will be crucial.
Policymakers must consider how to create an environment that encourages investors to remain engaged while ensuring that tenants have access to affordable housing.
For property investors, this trend underscores the importance of understanding market dynamics and regulatory changes when making long-term decisions.
