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Tax change in the US could hit house price growth in coming years

Despite fast rising home values now, housing experts in the United States say they expect price appreciation to slow to below 3% by 2021.

New changes to US tax laws have led 41% of respondents to the latest Zillow home price expectations survey to lower their long term expectations for the housing market.

The quarterly survey, sponsored by Zillow and conducted by Pulsenomics, asked more than 100 housing experts and economists about their expectations for home price growth, and whether tax reform affected these predictions.

When asked how the new tax law impacted their five year forecast for home values in the some 41% said their overall housing outlook is now more pessimistic, while 31% of the panellists had a more optimistic view as a result of the tax reform. The remaining 28% said that tax reform did not change their outlook.

The Tax Cuts and Jobs Act, enacted in December 2017, limited many itemised deductions such as the mortgage interest deduction while expanding the standard deduction. Most taxpayers take the standard deduction, and will see take home incomes increase as a result of tax reform, providing a boost to spending, savings and investment this year.

One possible reason for the experts’ pessimism is the fear that cutting taxes when the American economy is already running at full capacity increases the risk of a downturn in the next five years. This could push the Federal Reserve to increase interest rates faster than had been expected, according to Zillow senior economist Aaron Terrazas.

‘By expanding the standard deduction, tax reform will put more money into the typical American’s pocket in 2018, which will boost spending and could help renters save faster for a down payment,’ he explained.

‘But the longer term outlook is less rosy. There is some concern that tax cuts at this point in the business cycle may be throwing fuel on an already ranging fire and could lead the economy to overheat,’ he pointed out.

‘Most economists we surveyed see a stronger outlook for the housing market over the next year or two but a more pessimistic outlook on the longer horizon,’ he added.

In the near future, experts raised their predictions from previous surveys for home values as limited inventory and high demand keep prices moving higher.

Despite the rosy outlook for home prices over the next few years, homes today are less valuable than they would be if the recession had not happened. If the housing bubble and bust had not happened, and home values had instead appreciated at a steady pace, the median home value would be about $214,500, some 4% higher than its current value of $206,300.

‘The persistent short supply of entry level homes for sale has highlighted just how bifurcated the US housing market has become. The experts project that the value of homes in the bottom third of the market will appreciate at 6% this year, double the rate expected for the highest priced tertile,’ said Terry Loebs, founder of Pulsenomics.

‘Limited inventory of low priced homes, coupled with expectations for rising interest rates, likely foreshadow a frenetic, anxiety filled spring buying season for qualified first time home buyers,’ he added.