It’s never a good time to sell when property prices are falling and, yet, investors are doing that in great numbers in Melbourne.

The million-dollar (or less than $1 million median house price there these days) question is why?

Why would anyone decide to sell when market conditions may negatively impact your sale price – apart from those with the urgent financial need to do so?

Policy problems

To understand why, we also need to consider that this time a few years ago, investors were quite happy in Melbourne and Victoria.

Sure, property prices didn’t boom as much there as they did in many other parts of the nation during the pandemic, but generally speaking, investors were staying put.

How do we know this? Well, the 2022 PIPA Investor Sentiment Survey found only 19.1% of investors had sold a dwelling in Victoria in the two years to August that year, compared to 45% in Queensland and 24% in New South Wales.

Today, though, those percentages are starkly different, with the 2024 PIPA Investor Sentiment Survey finding 31% of investors who sold in the past year had sold at least one investment dwelling in Victoria – the same elevated level as recorded in last year’s survey.

But it is when you drill down into where they sold in Victoria that the picture becomes clearer. That’s because nearly 22% sold a property in Melbourne this year, following 25% last year.

Regional Victorian investors have not been selling up such in great numbers in comparison, no doubt because of the lower price points and better yields that continue to be on offer in great locations such as Geelong and Ballarat.

There is no question that Melbourne’s market is currently viewed as one of the most challenging around the nation.

The latest CoreLogic Home Value Index found that the Melbourne median dwelling value has fallen 1.4% over the past year – the worst result of any capital city.

At the same time, Adelaide and Brisbane has posted double-digit price growth, with plenty more appearing to be in the tank, too.

So, what’s the story with Melbourne?

Well, like many soft markets, there are a variety of things that are dragging it down.

One of the biggest impediments to the Melbourne property market was the announcement in May last year of a new land tax regime.

The scheme will see investors with holdings in Victoria pay a new flat rate tax of up to $975, plus an additional levy on the value of their land from 1 January this year.

The “temporary” measure will last for the next 10 years as part of the government’s plan to pay down its COVID debt.

The landholdings component of the COVID debt levy outlined in last year’s Victorian budget are set to raise $4.7 billion by decreasing the tax-free threshold for general land tax rates for properties that are not a principal place of residence to just $50,000.

The government expects 860,000 property investors will be affected, of which 380,000 will be first-time taxpayers.

On top of this blatant cash grab, the Victorian Government has introduced a raft of rental reforms over recent years, which are seen as anti-property investment.

One might argue that how does a new land tax, and some tenancy legislation changes, drag down an entire market?

Well, it’s because investors represent about 28 per cent of property owners in Victoria – that is a big proportion of any market to negatively target – with the consequences now becoming acutely apparent.

With the median dwelling value in Melbourne now more affordable than Brisbane, Perth, and Adelaide, many investors are no doubt considering buying there to supposedly take advantage of this unusual price disparity.

But just because somewhere is cheaper than it used to be doesn’t necessarily mean you should buy property.

Sure, Melbourne is a big capital city, but the decade-long punitive land tax regime has every chance of being a drag on its property market for years.

In the meantime, there are plenty of other much better investment-grade locations available in select parts of Southeast Queensland, Adelaide, and even in regional Victoria, for those who want to buy strategically, rather than speculatively.