House prices to fall, rents to rise

House prices look set to continue falling, with Westpac predicting they could fall around 4.7%, while rents look set to rise.

Wednesday, July 28th 2010, 12:00AM

by Maddy Milicich

In its latest economic overview released today, Westpac says although house prices have dropped 3% from the 2007 peak (dropping 12% when taking into consideration inflation decreases), they still have further to fall due to tax changes making property a less attractive investment.

It says tax changes will knock 14% off the fundamental value of residential property in the short term, but it only expects to see values decline by less than a third of that amount.

Impending tax changes, rising interest rates and slowing population growth "will reduce the fundamental value of houses, creating a renewed reason to expect ongoing price weakness," says Westpac.

Sales have been subdued this year, a solid indication that prices will continue to decline gently through to about September, Westpac says.

The bank sees more of the same over the next few years and is forecasting modest house price declines over the period ahead. Lower-end properties will be hardest hit, as landlords are most active in the cheaper parts of the market.

Westpac is also predicting rents will rise 7% relative to what they would have been without tax changes.

It says now landlords are receiving a smaller tax subsidy due to the removal of depreciation on buildings and increased GST costs make the maintenance and management of properties more expensive, they will pass on some of the increased costs to tenants.

Falling house prices and increased rents will also push up home ownership, relative to what would have occurred without tax changes, says Westpac, although it will take a number of years for these changes to work through.

The lone positive for house prices is the improving economy, which is set to flow on to better job prospects and job security. Westpac hopes better job prospects will "encourage more youngsters to fly the coop and enter the rental market - yet another reason to anticipate higher rents".

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