Will a ‘radical rethink’ fix Victoria’s rental crisis?

Pitcher Partners Melbourne partner and tax expert Craig Whatman stressed: “It’s a very complicated tax system that we’re living with in Victoria.” He suggested this system is putting the brakes on new apartments as developers become increasingly hesitant to outlay the necessary capital for major projects.

“We’re not encouraging foreign investment,” he assured, adding, “we’re not encouraging developers from a tax policy perspective to actually build these apartment towers”.

However, what he is encouraging is the establishment of a “more stable ongoing tax system, which leads to the whole question of having an annual property tax versus a transactional tax in stamp duty”.

He urged the Andrews government to reintroduce off-the-plan stamp duty concessions for investors while calling for a revamp of the state’s foreign buyer surcharge.

As the state edges towards “having an annual property tax that works on an ongoing basis for commercial and industrial properties but not residential properties”, Mr Whatman believes Victoria is on track to “end up having a two-tiered system”.

In May this year, the Andrews government announced plans to replace stamp duty for commercial and industrial property buyers with an annual property tax. The scheme is set to kick off on 1 July 2024.

Previous reporting on REB stipulated that, under the program, the first purchaser of a commercial or industrial property after 1 July 2024 will have the option to choose to either pay the property’s final stamp duty liability as an upfront lump sum or opt to pay fixed instalments over 10 years equal to stamp duty and interest with a government-facilitated transition loan.

“In my view, [this] is just going to make the property tax regime even more complicated than it currently is,” Mr Whatman said.

“Successive governments have imposed an ever-increasing tax burden on property developers, which disincentivises investment in the sector.”

Instead of the stick, he believes the “carrot approach would be more effective”.

This involves providing incentives for both domestic and international capital to enter the property development sector to inspire the construction of the necessary dwellings for both the present and the future.

“Providing investors with the capacity to think long term, without fear of additional taxes, is a critical step in encouraging more development in the apartment sector,” he said.

Aside from limiting taxation settings, Mr Whatman believes a planning complex system is restraining developers. Analysis from Urbis revealed the average time between lodging a development application and completing construction for major apartment projects is nearly five years.

“There are too many layers of entity upon entity that deal with planning decisions,” he said.

“Simplification from a tax point of view and a planning point of view would be a really good start.”

However, as Pitcher Partners Melbourne client director and property expert Benni Aroni explained, it’s not just tax and planning complications holding up major apartment developments but also blow-out costs.

According to the Australian Bureau of Statistics (ABS), Melbourne’s average apartment cost around $490,000 to construct in July, over $44,000 more than the cost of a new house built in the Victorian capital’s outer suburbs.

While the cost of construction and rents are both rising, he noted values stagnate, with CoreLogic’s September Home Value Index (HVI) revealing Melbourne’s unit prices rose 1.7 per cent in the last year, compared with Sydney’s 5.2 per cent growth over the same period.

Mr Aroni believes supply has taken the spotlight off the issue of demand, which he claims is “seldom talked about”.

He described an environment where “buyers have lost confidence for a bunch of reasons”, with issues such as apartment defects and flammable cladding popping up across the country.

“In Victoria, the price application for apartments has not been anywhere near what it should be,” he insisted, especially considering “rents have gone through the roof and there is limited supply”.

“All of those things have led to people having a very long, deep think about whether they want to buy an apartment,” Mr Aroni concluded.