Why is the Melbourne property market struggling so much?

In fact, over the last 12 months dwelling prices have been basically stagnant, while many other capital cities enjoyed double-digit capital growth.

So why would this happen considering its strong population growth due to immigration into Melbourne?

The underperformance of Melbourne's residential property market can be attributed to several factors, but the root cause boils down to economic challenges.

Economic headwinds

Victoria has experienced significant economic setbacks, particularly evident in the net reduction of 7,606 businesses during the financial year 2022-23, according to the Australian Bureau of Statistics (ABS).

In stark contrast, Queensland saw the greatest net increase in businesses, expanding by 11,031 in the same period.

Impact of lockdowns

One of the main reasons for the decline in business numbers in Victoria is the aftermath of the state's extensive lockdowns.

These lockdowns (totalling 260 days!) were the strictest in the nation and severely impacted small businesses, particularly cafes, restaurants, and retail shops.

Many of these businesses could not recover and were forced to close permanently.

Just go for a walk down the once-vibrant Chapel Street to see the fallout.

Tax burdens

Another critical factor is the increased tax burden on businesses.

The Victorian government introduced a payroll tax surcharge in the 2021-22 State Budget as part of a "mental health and wellbeing levy", targeting businesses with a payroll of $10 million or more.

This was followed by a further increase in payroll taxes in the 2022-23 State Budget as part of a 10-year COVID debt levy to repay the government's substantial borrowing during the pandemic.

These tax measures have made it increasingly difficult for larger businesses to operate profitably in Victoria, prompting many to consider relocating to more business-friendly states like Queensland.

Economic fortunes and property market performance

The economic struggles of Victoria have had a direct impact on the property market.

Where the economy and jobs go, the property market follows.

The poor performance of Melbourne's property market reflects the state's broader economic challenges.

At the same time…

Property investors are getting disillusioned with Melbourne

Property investors are increasingly abandoning the Melbourne market, driven away by stricter residential tenancy legislation and higher land taxes.

Recent reforms in tenancy laws have tipped the balance heavily in favour of tenants, making it more challenging for landlords to manage their properties effectively.

These changes include mandatory minimum standards for rental properties and stricter eviction rules.

While these regulations aim to protect tenants, they have also increased the administrative burden and costs for landlords, making property investment less attractive.

In fact, many investors feel control is being taken away from them by government interference.

Additionally, the Victorian government's decision to hike land taxes has further compounded the woes of property investors.

The introduction of a higher land tax rate for properties valued over a certain threshold has significantly increased the holding costs for investors.

This has eroded their profit margins and forced many to reconsider the viability of their investments.

And let's not forget Victoria's absentee owner surcharges, stamp duty surcharges and vacant residential land taxes.

Combined with the impact of stricter tenancy laws, the increased financial burden from all these taxes has led to a growing exodus of property investors from Melbourne.

Despite skyrocketing rents in Melbourne, many are now seeking more favourable investment environments in other states, where the regulatory and tax landscapes are perceived to be more investor-friendly.

In my mind, this is shortsighted because other states are also altering their residential tenancy legislation and amending their land tax rules.

A silver lining: the window of opportunity

Despite the current struggles, there is a significant opportunity in Melbourne's property market.

Property prices are considerably below replacement costs, creating a unique buying opportunity.

This situation is similar to the one in Brisbane and Perth three years ago.

Back then, both cities were experiencing a period of underperformance, but those who bought during that time have since seen significant capital growth as the markets recovered.

The path to recovery

Many experts believe that Melbourne's housing market could dominate other capitals over the next few years.

AMP chief economist Shane Oliver suggests that Melbourne's lengthy period of underperformance has primed the city for a robust rebound.

Improved affordability and rising rental yields are likely to attract investors and home buyers back to the market.

"It may take several rate cuts to fire up Melbourne's house prices, but when it occurs, it could come back with greater strength than what we're likely to see in Brisbane and Adelaide, and quite possibly Perth, depending on what happens with commodity prices," Oliver said.

Conclusion

While the Victorian government needs to find alternative solutions to address its debt without imposing further burdens on businesses, the current state of Melbourne's property market offers savvy investors a window of opportunity.

Buying properties below replacement cost in a market poised for recovery could yield substantial returns as the economic conditions improve and interest rates eventually fall.

Not only will strategic investors benefit from Melbourne's long-term growth, but they will also get a "free kick" as the Melbourne property market catches up and reverts to its loan term mean growth rates.

Photo by Fabian Mardi on Unsplash