Cash will be king for property investors

Investor demand has been a major booster of house prices, he says.

The proportion of bank mortgage lending to investors has remained essentially unchanged over the past four years. But the Government’s extension of the bright-line test and removal of mortgage interest deductions against rental income are likely to “reshape” the residential property market over the next few years.

“In the existing low interest rate environment, investors’ search for yield and capital gains on rental properties has underpinned rapid increases in house prices, but the Government’s plans to scrap mortgage interest deductibility against rental income is going to significantly reduce the prices investors are willing to pay for houses,” says Ranchhod.

Westpac’s economists have frequently highlighted financial considerations, such as rental yields, mortgage rates and tax, which play a bigger role in determining what prospective buyers will pay for housing than physical factors such as supply.