The Melbourne councils where rate rises have hit landlords hardest

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Key points

• New property investors are facing a widening gap between extra mortgage repayments and the rent they receive. 
• It’s prompting some to sell their rental properties, or take advantage of negative gearing tax concessions.
• Experts say extra rental properties are needed to cater for the growing number of new tenants from Australia and overseas.

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Melbourne property investors are facing mounting costs as their home loan repayments rise faster than rents climb.

An investor who bought in March would be worse off than if they bought three years ago in all of Melbourne’s local government areas – in some cases by hundreds of dollars a week – new CoreLogic data shows.

The worsening prospects have prompted some property owners to consider selling and others to claim tax deductions on negatively geared properties, while potential investors are holding back, which experts say puts pressure on the tight rental market.

The biggest deterioration was in Melbourne’s Bayside where investors buying the median dwelling face an extra $466 per week in mortgage repayments, as of March 2023, compared to three years earlier.

Rents there have increased by $54 a week since 2020, leaving an investor $412 worse off.

Likewise, in the Monash council area, rents have risen by $71 a week, but mortgage repayments on the median dwelling have increased $322 a week, a deterioration of $251. On the Mornington Peninsula, rents rose by $143, but mortgage repayments increased $392, leaving an investor $249 worse off.

New property investors in the Mornington Peninsula have one of the widest gaps between rent and mortgage repayments.Credit: iStock

Across all of Melbourne, the median investor’s position worsened by $137 a week.

The modelling was based on median rent and dwelling valuations, and assumes an investor has a 30-year loan term, paid a 20 per cent deposit, and is paying principal plus interest at 5.26 per cent. It does not account for the landlords who have built up equity or own their properties outright.

CoreLogic head of Australian research Eliza Owen said rising mortgage repayments had hit both investors and tenants.

Higher repayments had deterred investors, Owen said, with the latest Australian lending data showing the number of new loans to investors had dropped by about 45 per cent since it peaked in March last year.

“You’ve had a very blunt instrument to tackle inflation [with interest rate rises] and that’s affecting all new investors who are looking to get into the market,” Owen said. “Ultimately, this is limiting the supply of rental properties at a time when it is really crucial.”

Investors will not be able to cover rising mortgage costs through rent increases alone, she said, and many making a loss are looking to use negative gearing tax concessions.

The foregone tax revenue from these concessions is expected to rise significantly this year, as more investors are losing money on rental properties than they were in 2020 and 2021, when interest rates were at record lows.

Independent economist Saul Eslake said in the last house price peak in 2017, two-thirds of landlords were negatively geared.

That dropped significantly when interest rates fell to record lows in 2020 and 2021.

“We will see a significant rebound in the number now,” Eslake said.

But AMP Capital chief economist Dr Shane Oliver said rising mortgage costs could actually encourage more investors to get into the market, as they had in the past.

“It’s made negative gearing a lot more attractive than it was a year ago,” Oliver said.

However, any increase in investors would also depend on whether they would enter the market at higher prices than before, he said.

Grattan Institute economic program director Brendan Coates thought investors selling their properties would not have an impact on the market, especially if the home buyers were tenants, as they would no longer need a rental.

“Selling to a first-home buyer will have zero impact on the rental market,” Coates said.

Investors that had previously been positively geared, were now more likely to find themselves losing money and claiming negative gearing tax breaks.

More investors intend to sell their rentals.Credit: Peter Rae

An analysis undertaken by the Parliamentary Budget Office on behalf of the Australian Greens last year predicted negative gearing tax concessions would skyrocket to $97 billion over the next decade, but those costings were based on lower interest rates in November last year and lower rents, meaning foregone revenue would be higher now.

Investors considering their mortgage bills may be faced with other rising costs that influence their decision about whether to sell.

Jellis Craig Armadale partner Michael Armstrong said higher land taxes for investment properties and holiday homes, introduced last year by the Victorian government, have hit the investment market.

Phones lit up in March, he said, after investors received their latest land tax bill, with many wanting to sell up.

Extra costs related to maintenance introduced in Victoria’s new rental laws, have also encouraged investors to get out of the property market, he said.

“There’s really no incentive for people to keep rental properties at the moment,” Armstrong said. “All the new regulations are making it more expensive to maintain them.”

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