Challenging times ahead for investors: Westpac

“This could mean a significant risk for house prices and economic activity more generally and reinforces expectations that OCR hikes are a long way off.”

Ranchhod says financial factors play a dominant role in determining house prices. And investors account for a large share of the housing market.

“The changes to interest rate deductibility will significantly reduce the financial incentives to invest in housing.”

Before today, house price growth was expected to slow through the back half of the year as mortgage rate rises were forecast.

“The Government’s developments indicate material downside risk to that forecast.”

He says the moves are likely to be a significant drag on house price growth. And this is expected to reverberate through economic activity more generally.

“The housing market plays a key role in shaping economic conditions more generally.

“In particular, growth in house prices tends to be associated with increases in household spending and residential construction.”

He says the Reserve Bank’s OCR hikes are clearly off the table for the foreseeable future.

With a likely slowdown in house prices, the economy’s recovery is likely to be even more gradual. That will make it even harder to generate a sustained lift in inflation.

“The Government is conscious of the need to balance the pace of the economic recovery with its social aims, including ensuring access to affordable housing,” Ranchhod adds.

“These are challenging issues to balance in the wake of the ongoing headwinds from the Covid outbreak and loss of demand due to the closure of the borders.”