Budget takes $2b hit from property price falls

Declining Melbourne house prices and a broader property downturn are set to strip nearly $2 billion from the state budget over the next three years, even as the Treasurer bets on a swift market recovery.

While the residential sector falters, a surge in data centre construction is accounting for a doubling of growth in commercial building approvals, underscoring the government’s increasing focus on luring booming AI-driven infrastructure to the state.

Treasurer Jaclyn Symes said Treasury had cut its property taxation expectations by almost $900 million for the next financial year - a reversal from the December 2025 budget update which predicted sustained growth.

“That is a result of interest rate changes and volatility,” she said.

Banks and economists are now forecasting Melbourne house prices to decline between 1.7 per cent and 4 per cent in 2026, on the back of rising interest rates and global energy shock linked to the Middle East conflict.

Stamp duty revenue is predicted to drop to $10 billion in 2026-27, down from $10.6 billion the previous year and $600 million less than earlier projections. The budget papers say this reflects a “cyclical decline in the property market”.

Land tax receipts have also been downgraded by hundreds of millions over the forward estimates.

Overall, Treasury has lowered its taxation revenue assumptions by an average of almost $600 million a year for the three years from 2026-27 to 2028-29, which is largely attributed to a downturn in property tax revenue.

The government is banking on a house price rebound in 2026-27, when it expects a growth of 3.9 per cent and an average of 5 per cent a year over the forward estimates.

“A gradual improvement in credit conditions, household income growth, and robust underlying demand for housing are expected to support a period of sustained growth in land transfer duty revenue at around historical trend levels,” the budget papers said.

Those assumptions mean the revenue hit could be far greater if a property market recovery does not materialise.

Data centre construction is accounting for all the growth in the value of Victorian private commercial building work approvals.

The value of commercial building approvals is currently sitting about $13 billion, a huge surge from $6 billion at the start of 2025.

However, when data centres are excluded, the total value sits under $5 billion.

“The significant uptick in the construction of physical data centres is evident in data on building approvals and work done on Victorian building construction, where data centres are a rapidly growing proportion of overall commercial building investment,” the budget papers said.

The budget notes that investment related to data centre construction is a key factor driving a strong investment outlook.

However, it says uncertainty and potential supply disruptions arising from the conflict in the Middle East may constrain near-term growth in business investment.

While Premier Jacinta Allan vowed to “ruthlessly” chase jobs, experts are sceptical about long-term employment prospects in the sector, noting most are linked to the construction phase.

The e61 Institute, a non-partisan economic research institution, says data centres are “capital intensive and relatively small employers” with limited direct benefits.

It said the construction labour needed to build them adds only temporary demand that competes with other projects.

Urban Development Institute of Australia Victoria chief executive Linda Allison said it was unsurprising property revenue was down when the government’s tax regime was spooking investors.

“We’re more than 25,000 homes short of the government’s own targets, the apartment market in particular is struggling, and now we have a fuel crisis that threatens the viability of the industry,” she said.

Allison said the institute’s research showed reducing property taxes could ultimately lead to more money in state coffers through increased transactions.

“It’s a basic economic concept: encourage new projects through a more favourable taxation environment. Capital flows back to Victoria, our reputation builds as an attractive place to do business, more properties transact, and more revenue flows back to the state,” she said.

Parkville data analyst Tom Oliver, 28, is searching for his first apartment while renting with his sister, but says bank lending criteria is proving a greater hurdle than property prices.

While Oliver noted Melbourne remained more affordable than other major Australian cities like Sydney or Brisbane, he has struggled to secure finance despite having a 20 per cent deposit.

That’s in part because lenders often view studio and small one-bedroom apartments – many of which are priced under $400,000 in the inner-city – as risky collateral.

“They’ve told me they don’t finance small apartments in some suburbs altogether because of an oversupply,” Oliver said.

He wants the government to tackle soaring strata fees – which he has seen reach $7000 a year – by reining in construction costs and cracking down on industry conflicts of interest.

Oliver supports the state government’s activity centre program to densify inner and middle-ring suburbs near transport hubs, with proximity to rail one of his primary requirements in a property.

Property Council of Australia Victoria executive director Cath Evans said the downturn in property tax revenue was largely due to a decrease in confidence.

“Without action to restore confidence and support investment, there is a real risk that revenue will continue to decline as fewer projects proceed and market activity slows,” she said.

More Victorian budget coverage:

• News story: Labor unveils election-year splurge despite debt soaring to $199 billion
• Winners and losers: Cost-of-living relief for commuters, but pain in store for future taxpayers
• Analysis: Stubborn government refuses to pay down some of what it owes

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