10 Dec 20,000 units to flood Melbourne – Simon Pressley
Up to 20,000 extra Melbourne apartments that are currently sitting vacant, could hit the market within a few months. Whether the owners respond to the new ‘vacancy tax’ starting 1 January 2018 by adding these properties to Melbourne’s rental stock or resale stock, either way there’s a huge over-supply that’s about to swamp Australia’s second biggest city. Simon Pressley, Head of Property Market Research at Propertyology discuss the likely impact on the market.
Kevin: If you are an investor in Melbourne, you’re probably not going to like what we have to say, because apparently, 20,000 extra Melbourne apartments currently siting vacant could hit the market within the next few months. Why? What’s happening? What’s behind it? Joining me to talk about it, Simon Pressley from Propertyology.
Simon, what’s behind this? I can imagine 20,000 extra units in Melbourne is going to put a bit of a dent in the market.
Simon: That’s a large number. That’s a Victorian state government figure. What it is, Kevin, is the Victorian state government feel there’s a need for them to intervene and increase supply in the Melbourne property market.
On their estimates based on the lack of water being used in properties, they calculate there are about 20,000 dwellings in Melbourne that are sitting vacant permanently, and they’re trying to force those owners to make it part of the rental pool.
How they’re going to do that is they will charge property owners a vacancy tax. For a typical property, let’s say it’s worth $500,000, the tax will be $5000 per annum if that property is not occupied for six months or more in each calendar year. That’s a lot of money.
Now, there may be some existing property investors who elect to just pay the freight, suck it up and pay it each year and still keep it empty, but I’d suggest that for $5000+, a lot will either sell or they will do what the government wants and make it part of the rental pool. Either way, that’s a lot of properties to hit the market.
Kevin: It’s a bit like wealth tax, really, isn’t it? If you’re an investor and you have an investment unit, whether you leave it vacant or you put a tenant in it shouldn’t be anyone’s concern, to be quite frank. I really take exception to this.
What about someone who’s got a holiday unit and they don’t want to let someone else in, they don’t want to tenant it out; they want to use it whenever they want. This is really just a penalty on them, isn’t it?
Simon: There are a few exceptions, and I’m still digesting the fine print. This legislation has just come out. But a holiday home, you need to prove to the state government that you’ve occupied it yourself for four weeks or more, so there’s an exception there. Another exception is if you own a second property because you work and you want to live in effectively two homes, you need to prove that you’ve lived in this property for 140 days or more.
That might cover some of those 20,000 properties, but a large percentage of them, people – for reasons known only to them – they want to leave empty. Now, I’d suggest that that’s their right to do what they want. They paid all that money for an asset, they paid extra stamp duty in the first instance. If they don’t want to collect an income, so be it.
This is concerning for every property investor in Melbourne, in my opinion. It’s not just the $5000 that those who currently have an empty property will feel the pinch. Let’s make up a number, Kevin. If we said 15,000 out of 20,000 over the next few months hit the Melbourne rental market, all those existing property owners who are collecting rent, they have 15,000 extra properties that they’re competing against.
What’s that going to do to rent on their property? What’s that going to do to their own personal confidence? How might that affect their own mood, their behavior? That has a knock-on effect to retail trade, that has a knock-on effect to lots of properties being sold, a lack of confidence in the market, whether you’re an owner-occupier or an investor.
I’m getting increasingly concerned not just in Melbourne, Kevin, but too much government intervention. When we fiddle with market forces… If you think of property markets, we’ve had diluting negative gearing benefits, depreciation deductions in the last 12 months. That’s a federal government initiative. We’ve had APRA come in and make it harder for people to borrow money. We’ve had APRA also slug investors up to 1% extra in interest rates. And now we have a particular state government targeting other investors, as well.
I think it’s going to affect more than the owners of those vacant properties. Eventually, people are going to say “We’ve had enough,” and it’s going to significantly affect the mood of the whole population, not just the owners of the vacant properties.
Kevin: Of course, we talk about Melbourne, Melbourne is a fairly big market. Have you got any indication about the spread of those 20,000 units? Are they all inner-city Melbourne?
Simon: I think it was originally sold in parliament, Kevin, that it was the inner-city apartments, but I’ve been on the state government website today, they’ve named the local government authorities that are listed, and there was 16 of them in total. Greater Melbourne is made up of 31 city councils, so half of those are caught up in this legislation.
What we’ve done is we’ve looked at the suburbs in the outer city councils that are captured. North of Melbourne, we’re talking as far out as 15 kilometers from the post office, the eastern suburbs as far out as 35 kilometers. So, we’re talking most of Melbourne is going to be affected by this.
Kevin: This is not mooted legislation; this has actually been enacted. When does it start?
Simon: It comes into effect as of January 1, 2018, but it’s partly back-dated. My interpretation of what I’ve read on the state government website this morning is that the legislation was moved in parliament in May, so what they’re saying is to all existing property owners in Melbourne, “We’re going to give you a free kick, the first four months of 2017, even if it was empty, we’re going to assume that you had it occupied.” From May through December 2017 this calendar year, they need to have it occupied physically for an extra two months to make it a total of six months in this calendar year. If they’re a day short of six months, they’re paying the freight. They’ll be paying the example I used earlier, the $5000. And that’s how it’s going to be calculated every year.
Kevin: Wow. And, of course, there’s a bit of a knock-on effect here, too. It sends a very sobering message to developers, doesn’t it? If there’s going to be that much stock possibly coming on the market, someone who’s not out of the ground right now might say, “Well, I might just mothball this for another year or two.”
Simon: That’s exactly right, Kevin. Whenever governments intervene with market forces, invariably there are always unintended consequences. Now, this might take a couple of years before these unintended consequences are really realized, but you’ve made a really good example of one of those.
If a market gets saturated, think of all the future construction jobs that won’t probably be created because the construction industry will say, “Well, there’s already too much built; why would we build anymore?” Where will they go to get more jobs? When you have a damp property market, that also reduces demand for property-related jobs: real estate agents, property managers, conveyances, tradespeople.
There are always going to be knock-on effects here, and let’s not forget the state government coffers themselves. The single biggest revenue for any state government is stamp duty on property taxes. So, if we cause that much damage to consumer confidence and there are fewer property transactions in any authority, the state government will feel the pinch. And then there are the infrastructure projects and so on.
So, there’s going to be a knock-on effect from overregulation in the property sector.
Kevin: I appreciate your time, Simon. Thank you.
Simon: Thanks, Kevin. Let’s hope no more state governments jump in and follow suit.
Kevin: Exactly. Thanks, mate. Talk soon.