Beginning in October, stamp duty has been significantly reduced for all off-the-plan apartments, units and townhouses in Victoria.
This Victorian government initiative aims to spur development in a bid to ease chronic housing supply shortages.
Before, first-home buyers and owner-occupiers could benefit from a stamp duty concession on off-the-plan purchases, which permitted the deduction of construction costs from the sale price for the purpose of calculating the stamp duty owed.
Previously, the stamp duty concession for off-the-plan purchases was limited to first-home buyers and owner-occupiers: to qualify, the value calculated for stamp duty purposes, after construction costs were subtracted, had to fall below $750,000 for first-home buyers and $550,000 for owner-occupiers. If these thresholds were exceeded, the concession was not applicable.
Under the new changes, the concession has been expanded to include anyone purchasing an off-the-plan apartment, unit, or townhouse, regardless of their buyer status, so it now includes investors. Moreover, the value thresholds have been eliminated, making the concession available for properties at any price point.
The 12-month extended concession, which began at the end of October, permits a full 100% deduction of remaining construction and refurbishment costs in calculating the stamp duty due.
This means that, for developments not yet under construction at the time of purchase, stamp duty will be calculated based only on the land value, rather than the total price of the property. The savings are considerable: a Victorian taking advantage of this concession could save approximately $28,000 on stamp duties for a $620,000 apartment if purchased off-the-plan before construction begins — reducing the duty from about $32,000 to roughly $4,000.
Stamp duty concessions reduce the upfront costs for buyers, and these changes may mean some buyers are able to purchase sooner than they otherwise would have, of particular importance with housing affordability at its lowest level in three decades.
With the state having ambitious targets to meet in the completion of new homes, the move is a welcome step toward stimulating demand for new construction and being able to build more new homes.
The choice to focus on apartments, rather than houses, coincides with a period where the number of high-density homes planned for development has dropped to historic low levels on a per capita basis. Encouraging the purchase of off-the-plan units should also help support urban density objectives, making efficient use of land and infrastructure.
However, there are some challenges in whether this move will significantly move the needle in driving a recovery in the supply of high-density homes.
In recent years the residential construction industry has been challenged by capacity constraints and higher costs, with the cost of construction having risen more than 30% since the pandemic onset. The resulting tight housing supply is exacerbating already high rents and prices and the chronic shortage of housing.
Higher labour, materials, holding and financing costs compress margins, resulting in a lower return on investment with some projects no longer financially viable, which has delayed and cancelled many projects particularly in the high-density space.
Labour shortages and the surge in construction and financing costs has pushed up prices of new builds and this greater price inflation for new builds has increased the premium of buying new housing over existing.
A major hinderance to delivering new homes in the current environment has been the price discrepancy between new and established homes. In many cases, the current market price of existing apartments is not high enough for the feasibility of the development to stack up.
Though new builds are typically priced at a premium to existing, this premium has expanded significantly with cost escalations since Covid.
This has made buying an existing home more attractive for some and created a difficult environment for the pre-sales necessary for property development finance in the multi density sector, hindering the feasibility of new projects and contributing to the undersupplied apartment market.
In the inner Melbourne region, a part of the city that has historically delivered a large proportion of Melbourne’s new apartments, analysis of existing and new apartment sales shows the new construction premium based on median sales prices sat at 44% in September 2024.
This analysis of existing and new apartment sales in Inner Melbourne, home to hotspots of apartment development in areas like Melbourne city, Southbank, Armadale, Toorak, Carlton, and Docklands, show the median new construction premium has surged 29 percentage points over the past year alone.
This represents a more than $250,000 price gap. While the concessions on off-the-plan significantly minimise the stamp duties and help to minimise the cost premium buying new currently entails, it is not by enough to return this premium to more normal levels.
The same is also true in Melbourne’s inner east and inner south, home to areas like Kew, Burwood, Glen Iris, and Malvern where a lot of new apartments are also delivered. In Melbourne’s inner east, the median new construction premium has surged 31 percentage points over the past year.
Part of the price differential is likely a product of new apartment developers’ focus on the downsizer market. However, this significant premium illustrates prices of established units need to adjust upwards or the cost of supplying new apartments needs to reduce to see better pricing conditions, increasing financial viability and capital flows into building new homes.
For buyers that prefer new to existing and the investor market, the move is still likely to entice more to purchase. This may help to increase the feasibility of some projects, making it easier to achieve the pre-sales necessary for commencement.
Further, the concession now includes investors, for whom some prefer buying new given the depreciation benefits are at a maximum. This should be a step forward in bringing the investor market back in Victoria and aiding rental supply at a time of critical need.
The changes may also accelerate the introduction of new projects to the market, aiming to leverage the buyer access to these incentives over the 12 months to October 2025.
Overall, enhancing incentives for purchasing new properties is a positive step. However, there are many barriers hindering homebuilding that require continued work from the approval and planning phase, right through to completion.
