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Is 2025 A Good Time To Buy Real Estate In Melbourne?

Wise Real Estate Advice - Buyer Agents Melbourne > Is 2025 A Good Time To Buy Real Estate In Melbourne?

Will interest rates, inflation and new taxes crash property prices in 2025? 

When the Reserve Bank raises interest rates, it usually leads to a decrease in property values.

Higher rates often mean that people borrow less to buy property, which reduces the overall pool of funds available for any given property.

On top of this, state governments have increased land taxes and imposed stricter regulations on rental providers. Meanwhile, inflation has driven up the cost of almost everything.

So, why haven’t we seen a significant drop in the property market?

Let’s explore the factors that are currently putting pressure on the property market and how these elements might influence investing in 2025.

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A problem with supply. 

The constrained supply aspect often plays a significant role in property market dynamics. If there’s a shortage of available housing, it can put upward pressure on prices as demand outstrips supply.

The decision by the Albanese Government to welcome 650,000 new migrants by mid-2024 signifies a substantial shift in Australia’s ability to supply new housing. 

The warning from Infrastructure Victoria about the need to build 44,000 new homes annually in Melbourne underscores the pressing challenges posed by population growth. Accommodating an additional 3.1 million people by 2051 is a substantial task that requires careful planning and execution, particularly in the realm of housing.

However, the concern raised by SQM Research managing director Louis Christopher regarding the impact on the housing market is notable. With Melbourne already grappling with ultra-low rental vacancy rates, a surge in immigration could further put upward pressure on property prices. 

Patience for better interest rates?

If you’re watching mortgage rates, holding off could be a smart strategy. Rates play a big role in the overall cost of owning a home, so waiting for a better rate might save you money in the long term.

Rates climbed throughout 2022 and 2023, with many expecting them to drop alongside inflation by late 2024. While inflation has eased by the end of 2024, it hasn’t reached the Reserve Bank’s 2.5% target, which is why interest rates are expected to stay put for a while longer.

However, all of the big four banks are predicting that rates will start to decrease in February 2025.

The elephant in the room, declining inflation. 

In 2023, the Reserve Bank of Australia (RBA) initially forecasted that inflation would drop to around 3¼ percent by the end of 2024 and fall back within the 2-3 percent target range by late 2025. However, the RBA has since revised this outlook, now predicting that inflation will return to the target range in 2025 and reach the midpoint of the target in 2026.

Historically, lower inflation tends to lead to lower interest rates, making borrowing cheaper. When interest rates drop, households are encouraged to take out more loans due to the prospect of reduced repayments. This trend not only boosts borrowing across various sectors but also has a significant impact on the housing market.

With lower interest rates, homeownership becomes more attainable as mortgage repayments become more affordable, driving increased demand for housing.

How Melbourne’s New Land Tax Rates Are Shaping Investment Strategies

 In 2024, many suburbs across Melbourne have seen little to no capital growth, with some areas experiencing a decline of around 5%.

As a result, many Melbourne investors are selling their properties, and auction clearance rates are falling. What has caused such a shift in what was once considered the world’s most liveable city?

The 2020s have been challenging for Victorian property investors. They endured some of the world’s longest lockdowns, faced rising inflation, and have seen 13 consecutive interest rate hikes. Additionally, new legislation now mandates minimum standards and regular safety checks for rental properties.

The situation was further exacerbated when the Andrews Government introduced a temporary land tax surcharge in 2024, intended to address COVID-19 debt. This surcharge, added to the existing land tax, will be in effect for 10 years.

For example, if your property is valued at $1.6 million with the land component worth approximately $1.2 million, your land tax bill would now be around $15,450 per year. Over 10 years, if property values increase, you could end up paying more than $154,000 in land tax alone.

Investors with inner-city properties where the land value exceeds $3 million are now facing annual land tax bills exceeding $30,000.

New land tax rates.

Total taxable value of land holdingsLand tax payable
< $50,000Nil
$50,000 to < $100,000$500
$100,000 to < $300,000$975
$300,000 to < $600,000$1350 plus 0.3% of amount > $300,000
$600,000 to < $1,000,000$2250 plus 0.6% of amount > $600,000
$1,000,000 to < $1,800,000$4650 plus 0.9% of amount > $1,000,000
$1,800,000 to < $3,000,000$11,850 plus 1.65% of amount > $1,800,000
$3,000,000 and over$31,650 plus 2.65% of amount > $3,000,000

 

Owning multiple properties under this new tax regime can be particularly burdensome, especially in an environment of high interest rates and inflation. This is why many Melbourne investors are choosing to exit the market.

Given these factors, it’s clear that the Melbourne property market is undergoing a significant rebalancing of wealth.

Buy now or wait? 

The Melbourne property market struggled throughout 2024, with high holding costs and negative capital growth putting pressure on investors.

But will 2025 bring a change? With inflation expected to be within the RBA’s target range by late 2025, borrowing costs should decrease, offering investors some relief.

High migration is likely to tighten property supply, driving up rental yields and further improving returns while lowering holding costs.

As rental yields rise and holding costs decrease, 2025 is expected to be a stronger year for the property market compared to previous years. In many Melbourne suburbs, prices have dropped by about 5%, giving savvy investors a chance to enter the market at a discount.

>> Next Article: Is it good to buy property in a recession?

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