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Trump's tax reform curbs housing activity: Fed researchers

New York

PRESIDENT Trump's tax reform is likely having a negative effect on the housing market, according to a newly published study by researchers at the Federal Reserve Bank of New York.

In addition to the uptick in mortgage interest rates, the Tax Cuts and Jobs Act of 2017 contributed to the recent decline in new housing sales, said Richard Peach and Casey McQuillan, co-authors of the study, in a April 15 blog post.

Sales of new single-family homes declined by 7.6 per cent from the fourth quarter of 2017 through the end of the third quarter of 2018.

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And while mortgage interest rates rose by roughly 70 basis points during the period, the drop in home sales was larger than in the two previous episodes, in 2013 and 2016 respectively, when rates rose by a comparable amount, suggesting additional pressure of prospective home buyers.

Several factors may have deterred renters from taking the plunge: the US$10,000 cap on the deductibility of state and local taxes effectively increased what buyers have to pay and the lower marginal tax rates for many taxpayers also reduced the tax savings from housing-related deductions.

Although new buyers still benefit from deducting mortgage interest, the overall incentives to buy is somewhat reduced. Arguably the slowing is especially acute for higher-priced homes and homes in high-tax jurisdictions.

Although not yet conclusive, Peach and McQuillan were able to demonstrate that the changes in the tax laws increased the opportunity cost of buying - for potential new homeowners - and therefore played a role in the decline in the housing market. BLOOMBERG