New data from Victoria’s Department of Families, Fairness and Housing shows a drop of more than 20,000 active bonds in the state over the 12 months to June 2024.

When a home is rented in Victoria, the bond is deposited with the bond authority, providing the government with an indication of the total number of properties currently leased.

The data shows 21,712 fewer rental properties over that period, with this year marking the first time, on records back to 1999, that active rental bonds have declined in Victoria.

The state currently has the highest property taxes in Australia and landlords have struggled to keep up with significantly increased costs from minimum rental property standards legislation. The Victorian government has also increased property taxes on investment properties as part of the budget announced in May 2023.

These additional taxes have made owning a rental property less attractive in Victoria and combined with sustained higher interest rates and increased holding costs, many have sold investment properties.

While we cannot establish causality, the decrease in active bonds appears to correlate with an increase in investor sales. These data indicate the number of investors selling over the past year in Victoria could have been greater than 20,000.

The overwhelming majority of the decline in active rental bonds over the past year has been seen in Melbourne with metro areas experiencing a decline of more than 20,000 active bonds (-3.7% year-on-year) versus a decline of just over 1000 in regional areas (-1.1% year-on-year).

Every Melbourne LGA except Melton has seen a decline in active bonds over the past year, the worst hit LGAs have been Nillumbik, Port Phillip, Manningham, and Monash.

Melton is a new development hub in the city’s west and absorbs a large proportion of new dwellings in outer ring regions. Melton is experiencing rapid growth with state government estimates suggesting that the population is expected to grow to over 485,000 people by 2051.

As well as investors selling, Victoria did not attract the same uplift in investor activity as other states in the same period, meaning fewer new investors.

In the 12 months to June 2024, just under 50,000 new loans were made to investors in Victoria.

The net effect of those new loans to investors still resulted in 21,712 fewer rental properties in the state, illustrating that the number of investors who’ve sold up over the past could be up to 70,000.

Though of course, some of the investors selling and buying may be purchasing properties that don't have a rental bond, are not intended to be part of the long-term rental market, or remain vacant.

In a typical year active bonds have increased by ~20,000, with ~50,000 new loans going to investors implying the usual churn rate of sales could be ~30,000. That means it's possible that an additional 40,000 investors sold up in the year to June 2024 compared to a typical year. If that’s the case, that means more than double the number of sales relative to a more typical year.

During the same period, the number of new lettings fell 7% to 41,734 in Melbourne.

The number of new lettings has fallen in every SA4 region in Melbourne. The city’s outer east region has seen the largest fall (-17.8% year-on-year) while in absolute terms, the inner Melbourne region has seen the number of new lettings fall most (-1,153).

Every metro LGA saw rental prices increase in the 12 months to June 2024, the period through which active bonds plummeted, with annual rental price growth approaching 20% in some regions.

Encouragingly, while the cost of renting remains higher than a year ago (+7.5% year-on-year), the pace of price growth has slowed over the September quarter with median weekly rents for homes in Melbourne flat over the past quarter, as rents reach an affordability ceiling. This reflects an easing of rental demand with strained rental affordability forcing more people to move into share houses or back home with family. Overseas migration has peaked, and fewer international student arrivals are also likely easing demand pressures.

Generally, metro LGAs where active bonds declined the most in the 12 months to June 2024, have seen the largest falls in vacancy during that period.

On the flipside, Melton, the only metro LGA where active bonds have increased over the past year, has experienced an easing in rental conditions with vacancies increasing over the past year, though rental prices have still grown quickly over that period.

Rental demand is also likely to have been influenced by some tenants becoming first-time homeowners. High rental costs and low vacancy also make it more appealing for some to purchase their own home, with many renters seeing the value in the security of ownership.

The number of first-home buyers in Victoria is currently surpassing other states and the state accounts for a 32% share of all new loans to first-home buyers, with several factors helping to buoy first-home buyer activity.

One of them being the exodus of investors providing opportunities for first-time buyers to enter the market.

Melbourne remains one of the most affordable capital city rental markets in Australia. Picture: Getty

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Sold rental properties bought by previously renting first-home buyers can reduce rental demand and supply by the same amount, though it is difficult to ascertain whether the uplift in first-home buyer activity is from those previously renting, or those living at home with family.

In the period that active rental bonds in Victoria have shrunk by 21,700, close to 35,000 new loans were made to first-home buyers in the state accounting for around half of the potential 70,000 investor sales.

Melbourne does remain one of the most affordable capital city rental markets – only Hobart is cheaper.

But with Victoria projected to experience the most significant population growth of any state over the next five years, there will be repercussions if the rental stock continues to decline.

Given that new arrivals to Australia typically rent, a continued withdrawal of investors and fewer rental properties will have ramifications for the state's rental market.

If Victoria remains less attractive to invest in relative to other states, then it may eventually contribute to lower levels of new buildings to the extent that pre-sales to investors finance new development, particularly in the multi-density segment.

At the same time, the cost of construction and delivering new dwellings has increased and Victoria, like other states, is completing fewer than expected homes. And eventually if development activity is further constrained, these policies will lead to higher costs for both buyers and renters.