Land tax turning the screws on Victorian renters and investors
It turns out that taxes have a powerful effect on the markets they apply to – which is really bad news for Victorian renters and landlords.
When Victoria’s treasurer Tim Pallas introduced a radically broadened and much higher land tax regime in 2023 with a ten year “temporary” COVID levy and a starting point of just $50,000 for land tax purposes, he opened up a very powerful set of incentives to cause those owning rental properties and holiday houses to rethink their investment strategy.
It hasn’t taken long for the impact to become apparent with housing investors selling up and leaving Victoria’s property market for other states with lower taxes, dramatically reducing the supply of rental properties at a time when the rental market is already incredibly tight.
The higher and broader range of land taxes created a strong disincentive to investors, with the result being that in April, just 30.6% of all Victorian housing loans were taken out by investors.
There have also been many complaints from people who have been sent “automatic” land tax bills when they are not actually correct or justified, with the onus then falling on the person billed to have the tax cancelled.
Victoria lagging far behind on investment properties
Compared to Victoria’s paltry 30.6% of loans going to investors, a much healthier 40.5% of market share is for investors in NSW, 37.6% in Queensland, 35.8% in South Australia and 37% in Western Australia.
It would be hard to come up with a more statistically dramatic example of how a higher tax could rapidly disrupt a market in a way which must have left both property investors and renters in Victoria smarting from the market disruption.
If there is a silver lining to this particular cloud it is that many of the former rental properties and for that matter holiday homes that have made their way back on to the property market will have become owner-occupied homes, thereby alleviating at least one part of the housing shortage.
First home buyers getting some of the rewards – for now
That is shown by the fact that 24.9% of Victorian property loans written in April were to first home buyers – by far the highest rate in the nation.
By contrast, the first home buyer numbers interstate were just 18.2% in NSW, 17.5% in Queensland, 16.6% in South Australia and 20.9% in Western Australia.
However, even that reprieve is not too dramatic given that house building is running at about 51,800 a year in Voctoria – well below the State Government’s aim of building 800,000 new homes over the decade.
Money respects no state borders
What the numbers do show is how mobile the market is for investment capital within Australia.
Someone might live in Melbourne but there is absolutely nothing stopping them buying an investment property in Queensland or NSW – particularly if those investments come with a lower tax burden for at least a decade and possibly much more.
All of which must be causing some significant discomfort for Tim Pallas, who must have known what was coming when he introduced these higher and broader land taxes but may still be surprised at the strength of the reaction.
After all, usually the idea for state governments is to attract more investment into their economy rather than deliberately scaring it away with higher taxes and blaming a disease for the issue.
Death duty fight an example of state competition
For a real-life example of what can happen – in reverse – when states have different tax regimes it is instructive to look way back to 1978 when Queensland decided to abolish death duties in that state.
The significant number of retirees from NSW and Victoria who then started to sell up and move to Queensland with its tax haven status eventually persuaded all states to get rid of death duties altogether and eventually created a level national playing field of no death taxes.
Other states benefitting from Victoria’s decision
In this case the billions of dollars of investment that would otherwise have been spent in Victoria will definitely not encourage the other states to “copy” Victoria’s higher tax model – they would rather sit back and enjoy the gains.
Rather, all of the pressure will fall on Premier Jacinta Allan and Treasurer Tim Pallas as they weigh up the improved tax income which will come in handy given the mountain of government debt and associated interest payments in Victoria versus the flood of money leaving the state to literally set up (rental) residence elsewhere.
They might even consider the plight of the hard-bitten renter and the greater difficulty businesses will have attracting staff to a state with such a low rental vacancy rate.
As Sir Humphrey Appleby of Yes Minister fame would have said, the land tax decision certainly rates as a “courageous” one and may become more courageous the longer it lasts.
Will that decision stand the test of time or be re-visited?
There is some hope for a change.
After all, Tim Pallas has been known to back down before, the most recent example being the decision to scoop up GPs into the payroll tax net, only to change his mind once the ramifications of much higher doctor’s bills for many thousands of voters started to become apparent.