‘Straw that broke the camel’s back’: Why Melbourne property investors sold up in 2024

Owen Wells’ investment property was supposed to help fund his retirement, but renting out the CBD apartment ended up costing him more than $2000 a month.

Rising interest rates and other increased costs prompted 73-year-old Wells to sell the two-bedroom apartment he had been renting out for nearly 20 years.

Retired teachers Owen and Helen Wells have decided to sell their investment property in the CBD. Credit: Wayne Taylor

Wells decided to list the property for sale this year after his mortgage repayments jumped from $2900 to $4200 a month.

“It seemed like a good deal at the time because interest rates were reasonable ... I was getting good capital growth and I was getting good rental return as well,” Wells said. “It was basically there to support our retirement, for my wife and I.”

He said that after factoring in compliance costs, land tax, body corporate fees and rising interest rates, his rental return wasn’t enough to cover the cost of running the apartment, and he would rather sell than put up rents.

“My cash flow, just from my interest [repayments] alone is going from $35,000 a year up to over $50,000 ... so when I’m getting $36,000 a year in rental income, I’m just behind the eight ball,” he said.

“On top of that, [I have to pay] rates and body corp and agent costs, so I have a negative cash flow.”

Wells is among the thousands of Melbourne investors who have put their properties up for sale this year as a result of increased costs caused by high interest rates and increased land tax bills.

There were 2250 investor-owned properties for sale in greater Melbourne in May last year, the month the Victorian government’s COVID debt levy changes to land tax were announced, rising above 3200 by that October on CoreLogic data. They hit similar heights in February, a month after the changes came into force and added more than a thousand dollars a year to the costs of many second home owners.

By October this year, almost 3400 investors decided to sell up – the most since spring of 2021, when the property market was in a boom and owners were rushing to catch up after lockdown rules restricted their opportunities for selling over winter.

The share of properties owned by investors listed for sale has also been higher than in the past in 2024, reaching 36.2 per cent of all greater Melbourne listings in June. It is the highest since 2021, when investor listings hit 36.9 per cent that June. That figure hovered below 25 per cent throughout the second half of 2019.

CoreLogic research director Tim Lawless said the increased cost of owning an investment property in Victoria, including the cost of carrying out compliance works to meet the minimum standards for rentals, which came into effect in March 2021, has become a deterrent for landlords.

Compliance costs include replacing appliances such as air-conditioners, installing heaters or carrying out yearly smoke alarm checks.

“A lot of people are pointing towards the high taxation environment in Victoria as a disincentive for investment, which I think it is,” Lawless said.

“You’ve also got the tenancy reforms, which are adding to costs in terms of getting [rental properties to] standard, and you’ve also got higher mortgage repayment costs, and part of that has been offset by some fairly strong rental growth, but it hasn’t been enough.”

Lawless said mortgage repayments had risen more than rental income, and maintenance and construction costs had also increased.

“It will be very hard to find a property that’s going to be paying for itself in the sense of a positive cash flow, given that rental yields in Melbourne are averaging 3.2 per cent growth, and investor mortgage rates are generally sort of in the mid to high sixes,” he said.

Asked if the land tax increase was designed to tip the property market in favour of owner-occupiers rather than investors, a Victorian government spokesperson said: “Victoria is number one in Australia for approving homes and building them.

“Victoria is the best place to be a first home buyer. In the last financial year we accounted for more than 30 per cent of first home buyer loans in Australia, more than any other state.”

Investors are not only chasing rental return but also capital growth over time, which has varied.

Melbourne’s median house value has increased by 70.4 per cent over the past decade, but the median unit value increased just 24 per cent. And in inner-city Melbourne, 43.7 per cent of properties sold in the September quarter traded at a loss.

By contrast, an investment in a typical growth super fund a decade ago would have doubled in the 10 years to June 30, excluding any contributions, modelling from research house Chant West shows.

Fraser Lack, a real estate agent at BigginScott Port Melbourne, said more than half of the dwellings sold by his office this year had been listed by investors. Many couldn’t see the benefit of renting out a unit that wasn’t making good returns or growing in price.

“More than 50 per cent of the properties we manage in our rent roll are apartments, and a lot of them have shown very minimal growth in the last five years,” Lack said.

Lack said there had been a slight decline in his rental roll, and of the 60 properties his office was expected to sell this year, just one had been purchased by an investor.

“We’re not selling to investors, we’re selling to owner-occupiers,” he said.

What does it mean for renters? Grattan Institute housing and economic security program director Brendan Coates said investor selling might affect the number of new homes that were built, but had little impact on Melbourne’s overall rental supply.

“Where it can have more of an impact is if it reduces new rental supply, given that at least some particularly high density developments do tend to be financed by investors,” he said.

Coates said investor selling had paved the way for first home buyers to break into the property market.

“If an investor sells, that property is either bought by another investor or it’s bought by a first home buyer. If it’s bought by a first home buyer, then there is one less rental property, but there is one less household looking for a rental property,” he said.

“The net effect on the balances of supply and demand is practically zero, so the idea that investors leaving the market makes life worse for renters is just not true.”

What about potential buyers thinking of buying an investment property? Victoria has had a drop in new home loan commitments by investors in recent months, falling by 22.6 per cent from May to 3905 in September, ABS data shows. But the drop in first home buyer mortgage commitments has been shallower, falling only 12.5 per cent to 3082 over the same period.

The share of loans to investors in Victoria peaked at 34.3 per cent in June last year, a month after the changes were announced, and has not reached that level since. The share of loans to first home buyers edged up 2 percentage points over the same period, from 23 per cent in June last year to 25.2 per cent now.

Real Estate Institute of Victoria president Jacob Caine said that while high interest rates had made it difficult for investors who didn’t own their properties outright to sustain long-term rentals, land tax changes were the deciding factor.

“The land tax – or the COVID debt recovery levy – is the straw that broke the camel’s back for a lot of investors,” Caine said. “It’s the added imposition that probably shifted the needle for some from an affordability perspective.

“The land tax increases are not insignificant. We shouldn’t minimise them at any scale because if the difference for someone between keeping and selling a property is $1000 or $2000 per annum, then that’s real.”

Caine said the pace of the changes made it difficult for landlords to swallow, causing a negative sentiment among investors as they were hit with multiple increased costs.

New minimum standards for rental properties in Victoria came into effect in March 2021.

Interest rates climbed to 4.35 per cent in November 2023. Less than two months later, on January 1, the Victorian government’s COVID-19 debt land tax surcharge was introduced, and is set to remain in effect until 2034.

“The rapidity and scale of all of these changes in that short four-year period has translated into, probably, the most negative sentiment we’ve had around investing in Victoria from a property investment perspective, potentially ever,” Caine said.

Caine said investors should take a long-term approach to property investment, understand their obligations and ensure they are financially robust enough to weather the ups and downs of the rental market.

Outright ownership can make a difference to whether an investor feels they can hold on to their property. Landlords who have already paid off their mortgages still have to cover land tax fees and other costs, but are not feeling the crunch of rising interest rates.

Take, for example, “ethical landlords” Treens Alcorn, 41, and Thomas Shafee, 36. The couple, both research scientists, didn’t plan to invest in property, but after struggling to sell their one-bedroom apartment in Heidelberg Heights, they decided to rent it out to help cover the mortgage repayments on their new home.

Unlike investors who don’t own their properties outright, Alcorn said the cost of running the rental had remained low because they were able to pay it off with the help of family and hadn’t felt the pressure to put up rents.

Ethical landlords Treens Alcorn and Thomas Shafee, with baby Ada and dog Marcy, rent out their former apartment to help pay the mortgage on their new home.Credit: Chris Hopkins

Shafee and Alcorn rent out the apartment for below-market value via HomeGround Real Estate.

The couple were long-term renters before buying their first home, and have experienced firsthand the instability tenants often face.

“Unless we are about to become homeless ourselves, we are not going to kick [the tenant] out ... we view it as a responsibility,” Alcorn said.

Tenants Victoria chief executive Jennifer Beveridge said the churn of rental properties in Melbourne had made it tougher for low and middle-income earners to navigate the rental market.

“We need landlords to act responsibly, to be financially stable enough so they meet their legal obligations to provide a home that meets minimum standards and carry out repairs in a timely way,” Beveridge said. “They are not selling lollies, they are providing homes, and with that comes further layers of responsibility.”

Beveridge said market approaches alone were not going to fix the growing challenges of Melbourne’s rental market, and called for an accelerated effort from government to build more social housing.

AMP chief economist Shane Oliver said that due to the extra costs in Victoria, existing and new investors were now looking to buy property interstate, where costs weren’t as high as in Victoria.

“Victoria has introduced a bunch of measures which have made it tougher for investors, as part of their efforts to balance the budget,” Oliver said. “There’s also various rules and costs that have been introduced in Victoria, which has made it tougher relative to investors in other states, so consequently, investors have started to exit the market to some degree.”

Landlord and real estate agent Greg Brydon is planning to sell his Mordialloc investment property once the current lease is up because the cost of running it has become too high.

Brydon, director at Ray White Cheltenham, and Mentone renter, said he would rather sell the unit, which he has owned since 2019, and use the capital to buy a family home.

Real estate agent and rentvester Greg Brydon, with daughter Matilda, plans to sell his Mordialloc investment property. Credit: Simon Schluter

“Initially, we were making about $1500 a month from the property, when it was the cheapest interest rates, and now we’re losing approximately $2000 a month,” Brydon, 32, said.

“The first thing that happened was compliance checks came into place, meaning that we needed to spend around $900 a year to have the property compliant to be able to rent out. Then interest rates increased, which made it difficult. And then further to that, the new land tax ... land tax has just been the straw that broke the camel’s back.”

Belle Property Melbourne principal auctioneer Scott McElroy said about 80 per cent of the properties he had sold this year were listed by investors.

He said the vast majority of property owners, particularly those with apartments, had never paid land tax until the rules changed.

“Anyone who bought an investment property, particularly in the apartment space, in the last four or five years has had no capital growth whatsoever,” he said.

“As of January 1, 2024, they all started paying land tax because the threshold was reduced so much from what it was before.

“So, a lot of [investors] have just had enough.”

Owen Wells didn’t want to increase the rent on the property and decided the time was right to sell when his long-term tenant ended the lease earlier this year.

“I kept that rent below market value because he was such a good tenant, but if I was to [rent it out] again, it would have to be at least $700 a week, and that’s only going to give me $36,000 in rent ... it’s not really enough to cover my costs,” he said. “But I don’t want to put up rents. I have no interest in doing that. All I want is a fair return on my investment.

“I’m not making any money; I’m just losing money. I’m at least $2000 a month out. That’s a lot of money for me ... land tax, compliance costs and that sort of stuff, it’s just not worth it.”