House prices will fall: economists

Westpac economists expect house prices to fall about 2 per cent this year and another 2 per cent next year as a result of tax changes, rising interest rates and falling population growth.

Westpac economist Dominick Stephens said in real terms house prices had fallen 12 per cent from their peak in late 2007 and on today's fundamentals were only slightly overvalued.

But the tax changes due to take effect on October 1 would reduce the fundamental value of houses, creating a renewed reason to expect continued price weakness.

Much the most important change is the lowering of the top personal income tax rate from 39 to 33 per cent.

The tax laws allow landlords to use cash losses on property investments to offset other sources of taxable income, while capital gains are usually untaxed. Lowering tax rates reduces the value of that tax shelter.

Owner-occupiers also avoid tax in the sense that any other investment would incur income tax on the flow of benefits. "The tax cut will improve the return on alternative investments relative to buying a bigger or better house," Stephens said.

To read the full NZ Herald article, click here

Posted: 3 Jul 2010

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