Property investing in Canberra: Do the high returns outweigh the land tax?

Normally, any nation’s capital city would present fine opportunities for investors to buy property and, on the surface, Canberra looks no different.

It offers better house rental yields at 3.7 per cent than either Melbourne’s 2.92 per cent or Sydney’s 2.6 per cent, and its apartment yields, at 5.73 per cent, monster those cities’ 3.94 and 3.39 per cent, respectively.

And house price growth? According to the latest Domain House Price Report, Canberra prices jumped 36.6 per cent year on year, far clear of Melbourne’s 18.6 per cent and Sydney’s 33.1 per cent.

So why, then, are we not seeing a rush of investors to take advantage of such fetching fundamentals, especially with the national capital’s high level of employment and relatively light record of pandemic lockdowns?

“The biggest challenge in the ACT is land tax,” says Michael Yardney, the chief executive of Metropole Property Strategists.

“Canberra property has consistently done well over the long term and it’s not as volatile as other states but the high rates for all home owners and the disproportionately high level of land tax over stamp duty means investors shouldn’t be tempted to buy there.

“It’s a great place to buy if you’re going to live there as you don’t have to pay land tax on a principal place of residence or below a certain land value threshold, but investors should be wary.

“That will affect cash flow and, when you look at capital growth, that comes from the creation of more jobs so people can afford to pay rising prices,” Yardney says.

“I see high-paying jobs more likely to come in Sydney, Melbourne and, to a lesser extent, Brisbane.”

So even though the unemployment rate of 3.9 per cent in Canberra is tantalisingly below the national average, and it’s improbable that the federal government, as the region’s major employer, will shed staff any time soon, especially in an election year, investors need to take care.

Property Investment Professionals of Australia chairwoman Nicola McDougall agrees.

Even though Canberra has the second-highest median house price in the nation, the ACT is not often on the radar of investors, she notes.

“While its residents have high incomes and relatively steady jobs to help pay for high rent and mortgage repayments, the ACT is probably more of a home-owner market rather than an investor one,” McDougall says.

“That’s not to say that it doesn’t meet a number of investment fundamentals, but with a median house price of more than $1 million, second only to Sydney, it is probably not a location that many investors seek out. The ACT’s land tax requirements also make it less appealing for investors.”

Yet there are others who take a contrary view. At Canberra Property Buyer Solutions, principal Tom Duffy thinks that the high rate of land tax on investors’ property is far outweighed by the higher rental returns and healthy capital growth.

“The returns in Canberra are among the best in the country,” he says.

“They, together with the price growth, are good enough to absorb the land tax side of it. We are now getting a lot of interstate investors, particularly from Sydney, who can see how attractive Canberra is.

“I’d expect those numbers of investors to remain as Canberra continues going from strength to strength.”