The Victorian state government has decided to abolish stamp duty on certain properties. Is that a good thing? Is that a bad thing? Well, that’s exactly what I’m going to investigate in this episode, including my major concerns why so many property buyers will get burnt as a result of this scheme. Let’s dive in.

Hello, it’s Niro here, Major cuts to stamp duty have been announced as part of the Victorian government’s larger plan to supercharge housing supply with the much debated levy slashed for off the plan properties for the next 12 months. In an effort to stimulate development, the Allen government is slashing stamp duty on Victoria’s off the plan apartments, units, and townhouses to cut Upfront costs speed up building and make it more affordable for all home buyers to purchase off the plan.

Note, this does not apply to actual houses. The one-year stimulus, it’s only temporary, the one-year stimulus aims to support industry to develop more homes for buyers and renters across the state and is expected to cost the government $55 million dollars a year over the period. Taking immediate effect from Monday 21st of October, the temporary stamp duty concession is no longer capped to specific price points or first home buyers as it used to be.

Now all buyers are stamp duty exempt for eligible properties at any price point. Now I’m no fan of stamp duty. Removing it only on off the plan purchases in Melbourne is a scheme that I believe is fraught with disaster. Sure, If you’re someone who wants to buy an apartment to live and you are happy to buy an off the plan apartment, this could be a really good thing for you, allowing you to save on stamp duty costs to buy a property.

Before I share my concerns, let’s look at how much you’ll save if you do buy an off the plan apartment. The amount saved will effectively depend on how much construction has already occurred when the property is purchased. Stamp duty is calculated on the contract price, minus the construction costs incurred on or after the contract date.

Because the scheme is only. valid for a 12-month window. The government provided an example of a $620,000 apartment where no construction has started and that would attract just $4,000 in stamp duty, so it would save a buyer $28,000. So normally stamp duty in Victoria on a $620,000 apartment is around $32,000.

Assuming you’re buying this off the plan with no construction having started, you’re only paying $4,000 because that’s based off the land component associated with that apartment in this example. Now, here’s what worries me. I believe that you’re going to see many people out there spruiking these opportunities as great investment opportunities, because investors can now get these properties and save on stamp duty.

Now, the problem is you’re buying an off the plan apartment. So, you don’t know when is this going to be built? Secondly, you have no idea about the construction of the home. And we’ve seen so many examples in the past about how high-rise units have been built. And then there’ve been all sorts of issues with construction, which could certainly impact you going forwards.

But even if you’re happy to take those risks, the other two things that really bother me are, first of all, If you as an investor buy an off the plan dwelling, you’re actually buying a property that hasn’t been built yet. I know that sounds obvious, but what that means is you’re buying something where they’re increasing supply.

This is all about increasing housing affordability. Translation, it’s all about stopping property prices rising. So as an investor, if you’re looking to buy these sorts of properties, properties in Melbourne, in Victoria, you need to be so careful because I really believe that your capital growth will be compromised.

Why? Because capital growth comes from where demand is higher than supply. And right now we know that listings, so properties for sale in Melbourne are at high levels. They’re not actually falling. They’re actually increasing. So therefore, supply is already increasing in Greater Melbourne. We also know that Victoria has the highest number of properties being built on a state by state basis based on the previous construction boom that we saw after 2010.

And now they’re going to build more and more apartments. Look, I’m not against it if that’s what’s needed to help people have a home to live in, That’s fantastic. However, as an investor, it’s dangerous. You don’t want to be buying in an area. You don’t want to be buying a type of dwelling that’s going to, help increase supply, which will keep property prices low or affordable.

Remember all these measures are about affordable housing, but the other thing that really worries me. So, it’s not just the fact that you’re going to have huge construction risks. It’s not just, The fact that your capital growth is going to be compromised. The major problem I have is that so many spruikers are going to be coming out there saying, these are great investments.

They’re in a growth corridor. You’re going to save heaps in tax. This should be a great investment. You can buy it now. You don’t have to get finance approved until the property is built. And by that time, interest rates are probably likely to be lower, so you’ll have more borrowing capacity. You’re going to hit all these sorts of sales pictures.

The issue is you’re likely to enter a contract right now where let’s say an apartment is worth $620,000 but you’re probably going to pay $640,000, $650,000. Why? Because that $20,000, $30,000 goes to in commissions to the person who’s selling it. Now again, I don’t have a problem with this. If they tell you, look, a normal apartment like this would cost you $620,000, but you need to pay $650,000 on this one because we need to make $30,000 for our commissions.

If that was disclosed, that’s fine, and then you get to make an informed decision. Last time I checked, most of these off the plan apartments are sold with no one disclosing how much they, they earn, and they are sold in various different ways. different schemes and you just need to be careful. So, for me, I think that this stamp duty removal is actually a real danger sign.

I would have much rather they remove stamp duty on all properties, new and old rather than the government getting in bed with the construction industry. We’ve already seen Several issues related to the C-M-F-E-U in Victoria and the Victorian state government is now getting back into bed with the building industry.

Yes, I know we need to increase the number of properties in Australia. Yes, we have a housing crisis. That is all very, very true. But we just got to make sure that if you’re buying you’re making an informed decision You would not buy one of these off the plan properties in Melbourne because of capital growth potential You’re likely to lose money in the short term. There have been countless examples in the past where people have bought an off the plan unit And then had to sell it for a loss of money after several years, so what happens over that time period is not only then do you lose money because you’re selling something for less than you bought it for, but the opportunity cost, rather than buying an off the plan unit for say $620,000 in Melbourne because of this scheme, you would do far better off taking that same money and buying an established property in an under supplied market.

So, from a capital growth perspective, I would really be concerned. The other thing is if there are lots of these units being built, then supply is being increased. And if lots of investors start buying these, as I believe they will, unfortunately, rental supply increases again, which is great from the government’s perspective.

But if you’re one of those investors, you’re now competing with almost everyone else who’s bought a unit. And what happens if, They build too many and you now struggle to get your property rented. We’ve seen this happen in the past. I’ve been investing in property for 22 years. I’ve been helping people invest in property for 8 years with my company.

Over that time, I have seen so many people get burnt by these schemes. So please tread carefully if you’re an investor. Personally, I’d be running a mile. And in terms of then the Melbourne capital growth, I think you’re really going to see that growth be continued to be compromised for quite some time yet in most areas, because when you increase supply, yes, I’m talking about new properties, but you increase supply, the whole property market gets affected.

So apart from maybe 13, I think at most 15 suburbs from my latest research in Melbourne. I personally would not be buying anything in Melbourne right now if I wanted capital growth.

Do your due diligence. And if you want help with that, check out the link in the description below to get the audio version and digital version of my book here. It’s a full property investing blueprint based on my now 22 years of property investing experience.

Want Niro’s help to find an investment property? Find out more here 👇

https://www.investmentrise.com.au/property-buyers-agent-service/

Financial disclaimer: I am not your financial advisor and the opinions I share in this video are purely my opinions. This is not to be considered personal advice as it is general in nature.