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There were almost 100,000 homes sitting vacant or under-used in Melbourne in 2023, a new report has revealed.
Prosper Australia's Speculative Vacancy report, which examines water meter usage data, reveals 27,400 homes, or 1.5 per cent of all dwellings in Melbourne, were left entirely empty in 2023.
With the inclusion of homes that recorded less than a quarter of the average single-person consumption of water over the year, another 70,400 homes were significantly under-used last year, lifting the total to almost 100,000 homes, or one in 20 dwellings across the city, sitting vacant.
"That's equivalent to two and a half years of new construction, which is enough to house everyone on the Victorian public housing waitlist twice over," said Prosper Australia director of research and policy Tim Helm.
"It is a shocking waste that so many homes are left empty during a rental crisis, and it speaks to the state of inequality that these numbers keep rising.
"But we also need to recognise that it's a predictable result of a tax system that prioritises speculative asset incomes over rental yield.
"Under-taxing capital gains and over-taxing productive activity enables this. It's not surprising that so many investors prefer the flexibility of an empty property," he said.
The report also draws a link between vacant homes and "land banking", where developers delay feasible projects and set prices to deliberately slow sales in expectation of higher future returns.
"Empty homes are important to address, but to boost housing supply we must also tackle land banking, which is too often ignored or downplayed," Dr Helm said.
"Both stem from the same incentives and tax system distortions," he said.
What is a 'speculative' vacancy?
Since 2007, the Prosper Australia think-tank has been measuring vacant housing with its Speculative Vacancy reports to reveal the extent of unoccupied housing across metropolitan Melbourne and what it shows about land and housing markets.
It measures housing vacancy rates across Melbourne using data from Melbourne's three water retailers — Yarra Valley Water, South East Water, and Greater Western Water.
It says the data only exist because almost all dwelling units in Melbourne are individually metered, unlike in other capital cities.
Prosper says it labels empty homes as "speculative" vacancies because, regardless of the reasons for leaving them empty, the outcome is the same: If an asset only provides social value when it houses people, it is squandering its potential when it remains unused.
Holding an asset for capital gain rather than yield is called "speculation", so it extends that term to housing that yields no housing service.
This Speculative Vacancy report — the 11th in the series — examines unoccupied housing from 2019 to 2023, covering the period of the COVID lockdowns and aftermath.
The water meter data comprises postcode-level counts of dwellings that have active water connections (i.e. billing), covering 233 postcodes and 93 per cent of residential properties across the 31 council areas that make up metropolitan Melbourne.
Prosper excludes 33 postcodes from the data that correspond to holiday home areas (roughly 85,000 dwellings, the majority of which are from the Mornington Peninsula local government area).
Therefore, its study focuses on 200 postcodes across metropolitan Melbourne, covering 1.88 million dwellings with active water connection.
The paper uses two thresholds of water use to count vacant homes:
- Empty homes: 0 litres per day used over the calendar year
- Under-used homes: Between 0 and 50 litres per day used over the calendar year
Prosper says 50 litres per day (LpD) is a reasonable proxy for under-used homes, given the average water use for a single-person household in Melbourne is 200 litres per day.
It says water use below 50 litres per day occurs in completely empty homes that have water leaks, or that have gardens watered.
What were the results of the study?
In the 2023 calendar year, 27,408 dwellings in metropolitan Melbourne recorded zero water use (1.5 per cent of 1.88 million dwellings).
An extra 70,453 dwellings (3.7 per cent of total dwellings) used between 0 and 50 litres of water per day.
In total, 97,861 dwellings sat empty or under-used over the entire year.
That equates to 5.2 per cent of all dwellings in metropolitan Melbourne, or one in 20 homes.
"These vacant dwellings represent a huge pool of valuable resources not being used productively," the report says.
"At the average household size they could accommodate over 250,000 people."
The report says to illustrate the scale of Melbourne's empty housing stock, consider that:
- There are 48,620 applicant households on the Victorian social housing waitlist. Melbourne's vacant homes (97,861) could house everyone on the waitlist twice over
- There are 540,000 rental properties in Melbourne. If vacant homes were all put out for rent, the rental stock would be almost 20 per cent larger
- Each year, about 37,000 new homes are built. That means the number of vacant homes (97,861) equals more than two and a half years' worth of new construction
Vacancy rates through the pandemic period
The report says the number of speculative vacancies soared during the pandemic, increasing by 51 per cent between 2019 and 2021.
In 2023, the number of empty dwellings and under-used homes only declined a little from those COVID-19 peaks, so they are still sitting at elevated levels.
"Rental prices are 32 per cent higher than in 2019, yet the number of empty homes remains 25 per cent higher than in 2019, and the number of empty or under-used homes remains 43 per cent higher," the report says.
See the graphic below.
Where are Melbourne's empty homes?
Prosper Australia says Melbourne's middle-ring suburbs have historically had the highest vacancy rates, which remains the case.
But long-term vacancy is becoming less concentrated in the middle ring of the city, with new pockets of vacant properties now appearing in central and outer Melbourne.
The table below ranks the 31 local government areas (LGAs) in metropolitan Melbourne by their zero-use water and low-use water vacancy rates.
Here's how to read it.
In 2023, the Melbourne LGA (the first row in the table) had:
- 94,280 dwellings
- 2,153 empty dwellings that used 0 litres of water per day (0Lpd)
- 9,990 empty and under-used dwellings that used anywhere between 0 and 50 litres of water per day (<50Lpd).
- 2.3 per cent of its 94,280 dwellings used 0 litres of water per day
- 10.6 per cent of its 94,280 dwellings used less than 50 litres of water per day.
The table below ranks the top 10 postcodes in Melbourne by their zero-use and low-use vacancy rates.
Why does it matter that there are 100,000 vacant homes in Melbourne?
Prosper Australia says vacancy is not well understood.
It says there is little research about what drives it, partly due to limited measurement.
It says some explanations emphasise growth-focused investment strategies, investor inattention, tax avoidance, drawn-out estate settlements, loan conditions for investors, and slow adjustment of price expectations.
"But there is little evidence on which factors matter most or which policies would have the biggest impact," the report says.
But it says vacancy can also be explained as a result of inequality, a sign that renters can't afford to outbid the convenience value of an empty investment property.
"Some homes remain empty simply because their wealthy owners feel no need to use them," the report says.
In this sense, the economic explanation for vacancy boils down to the relative value of flexibility versus yield — the decision to leave a home vacant depends on the trade-off between "option value" and "cash returns" for the owner of the property.
"Empty property offers more options," the report says.
"When flexibility is valued highly, leaving property empty is rational.
"The value of flexibility over yield is higher when yields are low and property is valued more significantly as a growth investment. This has been the case in recent decades, with low and falling interest rates. Taxing capital gains less than rental income reinforces this trend.
"Flexibility is also more valuable amid market and policy uncertainty, such as during the pandemic years," it says.
Prosper says leaving properties empty is a private decision, reflecting the market allocating resources.
But is it in the public interest?
"It is wasteful for homes to sit idle while housing remains scarce and expensive," the report says.
"Whether this is efficient in the economic sense says nothing about whether it is equitable. Nudging even a portion of these homes into use could make housing cheaper for those in need.
"It shows us something important about housing markets — that housing supply is at the mercy of speculative incentives.
Speculation, housing supply, and taxation
Prosper says if we can understand why homes are left vacant it helps us to understand what drives speculation more generally, which is, in turn, critical to understanding housing supply.
"Speculation plays a larger role in the practice of land banking, where land is parcelled out slowly to maximise future profits," the report says.
"There is clear evidence that developers strategically delay financially feasible developments and set prices for land and new dwellings to drip-feed property to buyers."
The report explains how vacancy and land banking underscore the unique role of land.
"In a competitive market, could a firm leave productive assets idle?" it asks.
"Speculation happens because land is a monopoly. Tax and housing policy must acknowledge this reality.
"Policy design must begin with the recognition that land is limited, that it rewards its owners regardless of their effort, and that it captures the benefits of social progress in rising rents and prices.
"Speculation is a contentious topic. Acknowledging it challenges the dominant narrative on housing supply, supported by vested interests, which blames local democracy and public good regulation for problems not of their making," it says.
The report says governments around the world are increasingly turning to taxation of vacant homes to address unaffordable housing and the blight of under-used property.
It says some governments, including Victoria's, are also taxing vacant land to spur investment development.
But it warns Victoria's vacant land tax could run into problems, and a simple land tax would be a better solution for everyone.
"Vacancy taxes clearly work as incentives, but not without costs," it says.
"Effective enforcement is difficult and costly, and partial enforcement triggers costly avoidance behaviour. It's easy to leave the lights on or convert a vacant lot to a parking lot, for instance.
"A better way to achieve the same goals is to tax all land equally, vacant or not. Land tax is simple to administer, and respects property rights and incentives," it says.