VIC Land Tax Creates the Perfect Time to Invest in Melbourne - November 2024

By Rich Harvey, CEO & Founder, propertybuyer.com.au

For decades, the New South Wales Central Coast region was in a property market holding pattern. It was flying under the radar of homebuyers and investors alike. But COVID’s significant upheaval brought the region into the limelight. Now, a raft of drivers across the political and economic spectrum will deliver exciting times to the Central Coast – and those who own property will be among the biggest beneficiaries.
Anthony Knight, Principal buyers’ advocate for Propertybuyer on the Central Coast, has lived in the region for decades. We recently chatted about the region and why he’s excited about what’s to come.

Australia is unique in having a three-tier government structure — Federal, State, and Local — each heavily reliant on property taxes for revenue. As a result, real estate has become a significant contributor to government coffers. For investors, navigating this landscape can be daunting, especially with Victoria's expanding range of property taxes.

The State of Victoria, in particular, has become notorious for its myriad of taxes that directly impact property owners and investors. Beyond payroll taxes, the state imposes nine key property taxes, including:

1. Stamp Duty (Transfer Duty)
2. Foreign Purchaser Additional Duty (FPAD)
3. Land Tax
4. Absentee Owner Surcharge (AOS)
5. Commercial and Industrial Property Tax (CIPT)
6. Vacant Residential Land Tax (VRLT)
7. Metropolitan Planning Levy (MPL)
8. Growth Areas Infrastructure Contribution (GAIC)
9. Windfall Gains Tax (WGT)

Many property investors find these taxes not only complex but also discouraging. Among them, Land Tax has become a hot topic, especially with recent hikes that have put pressure on property owners across the state. Investors with larger landholdings, particularly in premium areas, are feeling the pinch as rising taxes eat into their cash flows. This has led to a surge in property owners choosing to sell, creating a unique window of opportunity for savvy investors.

Understanding Land Tax and Its Impact

Victoria’s Land Tax is calculated based on the Site Value (SV) listed on your municipal rates notice, which is determined by valuers under the Valuation of Land Act. The state's valuation approach can be quite aggressive, often assessing properties based on their “highest and best use.” This means a commercial property like a petrol station with a long lease can be valued as though it were a prime development site, leading to inflated tax bills.

While Land Tax aims to be equitable by taxing on a proportionate basis, it isn’t as broad-based as other taxes. For instance, principal residences are exempt, meaning the burden falls disproportionately on investors. This creates a disincentive for those looking to build long-term wealth through property investment.

The Counter-Cyclical Opportunity: Buy Now, Benefit Later

So, why invest in Melbourne real estate now, especially when sentiment in the market is at a low point?

The answer lies in understanding the cyclical nature of property markets. While Melbourne is currently experiencing downward pressure due to a combination of rising interest rates, increased property taxes, and policy missteps during the COVID-19 recovery, this downturn presents a rare opportunity for astute investors to buy at a discount.

Historically, property prices have always rebounded, driven by fundamental factors such as population growth, urban development, and a stable economic environment. Melbourne, being a major metropolitan hub, continues to attract both domestic and international migration, which ensures long-term demand for housing.

Why Buying in a Downturn Makes Sense

1. Discounted Prices and Motivated Sellers: With negative sentiment and increasing taxes, many vendors are keen to offload properties. This creates room for negotiation and the potential to secure properties below their intrinsic value. Buying in a down market allows investors to lock in discounts that wouldn’t be available during a boom.
2. A Hedge Against Inflation: Real estate remains one of the most effective hedges against inflation. Unlike stocks or bonds, property values tend to rise in tandem with inflation, preserving your purchasing power.
3. Leverage and Capital Growth: Real estate allows for higher leverage compared to other asset classes. The ability to borrow against the value of property means you can amplify your returns when the market rebounds.
4. Scarcity and Population Growth: Melbourne's property market is underpinned by strong fundamentals, such as limited land availability and ongoing population growth. This creates a natural floor for property prices, even during cyclical downturns.
5. Government and Banking Support: Both banks and governments have a vested interest in a stable and growing property market. While current policy may seem restrictive, historically, governments adjust policies to stimulate demand when they see market conditions soften too much. This could result in future tax concessions or stimulus measures that benefit property owners.
   

The Time to Act Is Now

While many investors are sitting on the sidelines, waiting for clearer signals, those who take a counter-cyclical approach and invest during times of uncertainty are often the ones who reap the biggest rewards. Buying property in Melbourne now, when sentiment is low and prices are softer, can position you for substantial gains when the market inevitably recovers.

Investing in real estate is a long-term game. By taking advantage of current conditions, you can acquire quality assets at a discount, benefit from future capital growth, and generate consistent rental income. As the saying goes, “the best time to buy property was yesterday; the second best time is today.”

The Victorian government's aggressive tax policies have inadvertently created an environment ripe for strategic property investors. By leveraging the current downturn, you can buy properties at reduced prices, secure attractive financing terms, and set yourself up for strong returns when the market cycle turns upward.

If you're ready to take advantage of these counter-cyclical opportunities, now is the time to act. Speak to a professional buyer’s agent who understands the nuances of the Melbourne market and can guide you through the complexities, ensuring you maximize your investment potential.

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