Melbourne Stamp Duty Update

21 June 2016

The Victoria State Budget announcement confirmed a 4% stamp duty hike for foreign property investors. Scott Hagerman explains what this means for your Melbourne investment strategy.

The Victorian State Government released its 2016/2017 State Budget Paper on 27 April which includes two new conditions that will affect foreign investors in Melbourne’s residential real estate market:

  • The stamp duty surcharge for foreign investors will rise from 3% to 7%. From 1 July, foreign investors purchasing residential property will pay 7% of the GST inclusive value of the property (either purchase price or market value, whichever is greater).
  • The land tax for foreign owners of empty properties will increase from 0.5% to 1.5% for all landed properties (usually houses). While this applies to investors who do not ordinarily reside in Australia, it will have minimal impact on the running costs of owning apartments in Australia for non-residents.

Implications for Melbourne's property market

As with the 3% stamp duty surcharge for foreign investors implemented in last year’s Victorian State Budget, in the short term the recent changes are likely to encourage a surge of activity prior to 1 July when the changes come into effect. This is expected to be followed by a brief slowdown, with the market likely to pick up again from September onwards.

However, with Melbourne's property market overwhelmingly driven by local demand and given the city’s soaring population – some 830,000 new residents arrived over the last decade – and its steadily growing economy, in the long term demand looks likely to continue its rise, taking prices with it.

The city continues to top the ranks as the world's most liveable city and is already on track to overtake Sydney as Australia's largest urban centre by 2056. As we revealed in a recent Market Update, within the city’s inner suburbs, there is already short supply of residential units and property prices continue to increase. In fact apartment prices gained an average of 5% per annum over the past decade, and recently prices have been accelerating, with Melbourne displaying average growth of 11% in the year to February 2016. With the additional taxes on foreign buyers, it is likely that development design will shift to owner-occupiers rather than investors, which may not only decrease vacancy rates but also make property easier to resell due to the market favouring local demand.

In addition, Melbourne is likely to experience a falter in supply as developers mothball projects for the next 12 to 18 months, driving up rental and sales demand, especially in chronically undersupplied areas such as the inner suburbs.

Implications for foreign investors

Last year’s state budget announcement had minimal impact on foreign investors, despite the introduction of a 3% stamp duty surcharge and a 0.5% land tax surcharge for foreign purchasers.

Meanwhile the tide of international interest in Australian property continues to swell. Foreign Investment Review Board (FIRB) figures for the year to 30 June 2015 revealed that Chinese investment had doubled from the previous year, to reach AUD24 billion – a significant proportion of the AUD97 billion of foreign capital invested in Australian real estate over this time.

While this year's changes may prove harder to swallow, it is likely that developers will take these new charges into consideration when pricing future developments aimed at overseas investors in order to absorb some of the tax burden.

In the longer term, Melbourne remains a stand-out destination for overseas real estate investors and other new measures announced in the State Budget should further enhance its appeal. The budget also included the allocation of AUD30 billion for infrastructure upgrades over the next four years. This breaks down to a AUD6.2 billion roads package which will include AUD1.5 billion for the Western Distributor, and the unprecedented announcement that the Victorian State Government will be the sole funder of the AUD10.9 billion Melbourne Metro Rail tunnel under the city's Central Business District.

Take action before 1 July

Frankie, Melbourne, Australia

That said, in the immediate term, we advise those who are considering Melbourne to take action well before the 1 July tax comes into effect. As an example, those purchasing an averagely-priced unit (AUD555,000) in Frankie, our current Melbourne development, would save AUD22,000 by investing and exchanging prior to the 1 July deadline.

Federal Budget announcement and upcoming Election

The upcoming Federal Budget – which has been brought forward to 3 May, breaking a 20-year convention of delivering on the second Tuesday of May – and the likely double dissolution election on 2 July may present further challenges to foreign investors looking at real estate in markets across Australia. However, at this stage, no changes are predicted that will significantly impact overseas property investors and a lack of any major policy updates relating to the real estate market bode well for its continued health. Check back to our Market Update and Blog pages for future updates as news emerges.


 

Scott Hagerman

Written by Scott Hagerman

Scott has over ten years experience in investment advisory and financial planning services for individuals and businesses. His career began advising wealthy individuals and small to medium sized enterprises on risk management in the UK and the US, and has focused on wealth management and real estate investing since moving to Hong Kong in 2010. He has six years experience evaluating real estate investment opportunities in the US, Canada, UK, Malaysia and Australia.

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