Is Melbourne losing its shine?

This article was originally published in the July edition of the Your Investment Property Magazine.

The Melbourne property market has typically moved in step with Sydney, like a synchronised waltz, mirroring each other's moves. But recently, Melbourne's rhythm has faltered - even as smaller capital cities have risen through the ranks. One look at the data tells you as much.

According to CoreLogic, Sydney's property prices have risen 7.4% since May last year. Perth's prices have surged 22%, Brisbane saw a 16.3% increase, and Adelaide experienced 14.4% growth. But Melbourne is severely lagging behind with just a 1.8% annual increase in property values.

For the first time in 14 years, Brisbane's median property value surpassed Melbourne's. The pace of home price growth in Brisbane is more than 10 times as fast as the growth in Melbourne in the year to date. So what the heck is going on?

What's going on in Melbourne?

Arguably the best city in Australia (according to yours truly), Melbourne has a lot going for it. It's got the best food, the best coffee, the best art, theatre and wine. It's got Revs and Pellegrini's. It's even got carrot man.

But ask any investor what they like least about the state and they'll probably point to its onerous tax policies and strict rental laws.

Late last year, the Victorian state government announced it would be introducing a "temporary measure" over the next ten years to pay back some of its COVID-19 debt. That measure was in the form of a new land tax. As of January 1 this year, Victorians who own a second home or an investment property would be charged a flat rate $500 annual tax on properties with a land value between $50,000-$100,000. That payment would increase to $975 for properties valued between $100,000 and $300,000, while an extra 0.1% of the land value would be applied to properties worth more than $300,000.

Meanwhile, the absentee owner surcharge jumped from 2% to 4%.

Speaking of the land tax bill at the time it was announced in October last year, outgoing Real Estate Institute of Victoria (REIV) President Quentin Kilian said it would only drive more investors out of Victoria.

"The exodus of rental providers has increased over the past year and with yet again another round of taxation aimed at the property market, there is no doubt that investors will continue to leave Victoria, exacerbating the rental shortage.

"…the only behaviour this idea will initiate is for more landowners to sell-up and continue to turn away from Victoria for investment."

And that's exactly what's happening.

Lending data released by the Australian Bureau of Statistics (ABS) for March revealed investors are being selective with where they park their cash. Victoria recorded a meagre 0.2% increase in investor loans over the month, compared to NSW and QLD which posted a 6.2% increase. On a yearly basis, NSW notched up a 35% increase in investor lending, while QLD a 64% increase. Victoria only saw a 6.3% lift in investor lending.

One of the biggest findings to come out of the Property Investments Professionals of Australia (PIPA) annual investor sentiment survey was that an alarming number of investors feel they are no longer in control of their assets.

Of the 38% of respondents who indicated their intention to sell within the next year, 47% of those nominated governments increasing or threatening to increase taxes, duties, and levies as the reason why.

When asked to rank the states least accommodating of property investors, a staggering 57.4% nominated Victoria.

Only 4.7% of respondents nominated Victoria as having good investment prospects over the next 12 months - the lowest ever result for the state and a huge plunge from the previous year's result of 12%.

"The new land tax in Victoria has caused a significant ruckus amongst property investors, with many voting with their feet and selling up," Director of Hotspotting Terry Ryder told Your Investment Property Magazine.

"Indeed, the new land tax as well as a raft of rental reforms has resulted in Victoria, and specifically Melbourne, being on the nose with investors at present."

Property values are stuck in the doldrums too. CoreLogic's May Home Value Index showed that not only has Melbourne's median dwelling value been overtaken by Brisbane, so too has its median house and unit values for the first time since June 2008. Admittedly not by much - Melbourne's median house value is only $190 short of Brisbane's, while its median unit price is $1,130 lower than Brisbane's.

But it's certainly indicative of a bigger problem. Coming into the pandemic, Melbourne's median dwelling value held a 37% premium over Brisbane's. Since the onset of COVID however, Brisbane values have increased at more than five times the pace of Melbourne values, with growth of 59.8% and 11.2% respectively.

Of course, an exodus of investors isn't the only thing pushing down the median. Rezoning greater Melbourne to include far-flung suburbs and the new developments going up on the fringes is also contributing to this trend.

"Changes in zoning laws to allow for increased density in certain areas can stimulate development and increase housing supply, potentially influencing property prices in those regions," Dr Diaswati Mardiasmo told Your Investment Property Magazine.

But it's fair to say the increasing negative sentiment towards Victoria has a lot to answer for - the data speaks for itself.

Could now actually be a good time to invest in Victoria?

Michael Pell, Managing Director of Propell Property, suggests that now might be an opportune moment to invest in the Victorian market.

"We're having a really close look at Victoria now because of the fact that so many people have been turned off Victoria," he told Your Investment Property Magazine.

"Now a lot of that's not necessarily the numbers. A lot of that's more just the frustration of the government, with people saying 'Stuff if. I'll sell my investment property, or I won't invest there because of that'.

"But when you actually dive deeper and realise that if there are fewer investors going in there and there's less competition, as an investor, you're going to have something that not many others have. You can get yourself into a pretty strong position.

"So, we're starting to look closely at Victoria now and doing the opposite of what the herd is doing."

Hotspotting's Ryder agrees.

"It's vital for property investors to look past the current short-term negative sentiment about the new land tax and rental reforms to recognise that the economic fundamentals of Melbourne and Regional Victoria remain overwhelmingly sound," he said.

"Those who can see past the current doomsday narrative will be ones that achieve the best results in the years ahead.

"Melbourne is our largest city by population and has a very bright future, so, anyone who discounts it as not being an investment-worthy location would be very mistaken in my opinion."

Dr. Mardiasmo also agreed that the current conditions could offer a real opportunity for savvy investors to enter the Victorian market.

"Victoria presents itself as an ideal place for investment right now, due to its journey in the price recovery stage," she said.

"Many suburbs are more affordable than before or have similar median house or unit prices to Brisbane and Hobart - capital cities that were once deemed to be more affordable than Melbourne. This creates a real opportunity for investors."

As for where to look, Dr Mardiasmo recommends high-growth suburbs such as Flemington, Point Cook, and Northcote, and looking towards the regions.

"Many [regional] locations offer affordability, higher rental yields, and lower vacancy rates compared to metropolitan areas. You have a lot of possibilities."

Image by James Bernstein via Pexels