The Andrews government has dumped its controversial plan to introduce a new housing development tax to help pay for social housing projects, amid fears of a backlash on housing affordability.
It has also pulled a suite of planning reforms that would have boosted profits for developers.
Treasurer Tim Pallas said the reforms were now off the table for good and would not be considered by a re-elected Labor government.
"They are done, they are dusted and they are finished," he said.
He said it was "clearly a disappointing result".
"The key for the government is that we've been left with no choice given the fact that the property sector's response to these reforms has been clearly negative in tone," Mr Pallas said.
The 1.75 per cent levy on the value of new developments would have raised about $800 million a year and the government said the money would have gone towards building 1,700 social housing units each year.
The Treasurer said the response was particularly disappointing "given the amount of time and effort the Minister for Planning [Richard Wynne] had put in in the engagement".
"We expected to see a better response from the building and construction industry," Mr Pallas said.
"In fact what we got was a misinformation campaign."
Councils and the property industry strongly opposed the move, with the latter raising concerns about costs being passed on to homebuyers.
Councils were critical of a change within the reforms that would have exempted social housing residents from paying rates, with some councils estimating such a shift would cut millions of dollars in income each year.
Ever since the tax was announced there has been some frustration within Labor ranks about the damage a battle over housing affordability could do at the November election.
Labor MPs and strategists had questioned the wisdom of the levy in an election year.
But others were worried about the missed opportunity for serious regulatory reform of the planning sector.
The government had estimated the reforms to planning rules would have increased profits in the sector by $7 billion and driven housing affordability down by creating more housing stock.
Decision largely welcomed as 'only sensible' option
Shadow Treasurer David Davis described the decision as a "humiliating backdown" by the government.
"Daniel Andrews would rather bully industry to conform with its plans rather than work with them on agreement that best reflects the interests of all Victorians," he said.
"The fact that planning reforms, which would help address the issue of housing affordability in our state, aren't considered unless you agree to a big new tax speaks volumes on how this government operates."
The Urban Development Institute of Australia's Victorian branch chief executive Matthew Kandelaars described the decision as a "win for homebuyers" and claimed the change would have cost homeowners up to $20,000.
"Scrapping this tax was the only sensible thing to do," he said.
"UDIA Victoria has always supported a broad-based contribution to fund social and affordable housing, through which the burden is shared across the whole community and we remain available to Government to discuss how such a mechanism could be implemented," he said.
The Australian Services Union's secretary Lisa Darmanin also welcomed the decision, with a focus on the fact that the proposal would have made social housing residents exempt from paying council rates.
"Our union thanks to the government for listening to the genuine concerns of the local government workers and the local government sector with the rate exemption," she said.
But the Property Council of Australia said it was "incredibly disappointed" by the Victorian government ditching the reforms and said the changes had been developed through three years of engagement.
"We have been ardent advocates for planning reform and a better system to deliver social and affordable housing on behalf of the property industry, and the broader Victorian community," the organisation said.
It described the reforms as a "generational opportunity" to improve the state's planning system.
"The shelving of the planning reform will cost Victoria tens of thousands of additional jobs, increase the cost of producing new housing in Victoria and sadly, push the dream of home ownership and housing accessibility further away for many Victorians," it said.
