WELLINGTON, March 23 Reuters  Measures announced by New Zealand on Tuesday to cool its red hot property market could see home prices settle around 10 lower in the long term, and there could be much greater effects in the short term as some investors exit the market, Westpac Bank said.

New Zealand introduced a raft of measures, hitting investors with new taxes and promising to boost the housing supply, as prices had become the more unaffordable than ever for first time buyers.

The tax policy change that no longer allows rental property owners to deduct mortgage interest from their expenses was a gamechanger, Westpac economist Michael Gordon said in a note.

We estimate that house prices could settle around 10 lower over the long term, said Gordon.

But there will be consequences for the economy, as lower house prices will have knockon effects for activity, spending and inflation.

We will be carefully working through the implications for our forecasts. Monetary policy will need to remain easy to support the economy through the transition period. A negative OCR official cash rate remains on the table, said Gordon.

The New Zealand dollar weakened 0.8 after the announcement to 0.7105, near its lowest levels this year, as investors bet that the housing measures would reduce the likelihood of interest rate hikes.

Reporting by Praveen Menon

Source Reuters