Westpac chief economist says he can provide a definite answer in response to incoming changes
Will changes to the tax system affect house prices? Westpac New Zealand says the answer is a definite “yes.”
According to Westpac, property prices in New Zealand are profoundly affected by the tax system. It follows that changing the tax system would change property prices.
Westpac chief economist Dominick Stephens said introducing a 10% capital gains tax would reduce house prices by 10.9% relative to the counterfactual.
“The kicker is the fact that expenses, including mortgage interest, are tax deductible,” he said. “This feature of the tax system is especially useful for property investors, who find it easier to borrow against their investments than other businesses.”
Stephens also noted that changes to the tax system will lead to a higher rate of ownership. With investors willing to pay less for a property, he said, more auctions/tenders would be won by aspiring first-home buyers and the rate of home ownership would rise.
Stephens also says Westpac assumes that owner-occupiers (first-home buyers) would be exempt from the property tax.
“If so, then landlords’ overall tax advantage relative to leveraged owner-occupiers would diminish, and home ownership would rise,” he explained.
Westpac provided estimates of how tax changes would affect house prices, using its Investment Value of Housing model.
