President Trump enjoyed a major victory this past December on tax reform. The Tax Cuts and Jobs Act (TCJA) ensures measures that have long been on the Republican agenda, by slashing corporate tax rates, reducing top personal income tax rates, and offering various deductions to middle-class families. It also reduces some deductions available to homebuyers. This latter move was celebrated by a bipartisan cluster of government types who view such breaks as an unfair carve-out for the rich. But until these reforms are active for longer, nobody can know how they will affect consumer decision-making, and the overall housing market. This means that developers, owners and renters of affordable housing, who are susceptible to market and policy changes generally, will share in the uncertainty.

To be specific, TCJA brings three reforms into the tax code regarding home-based deductions. It reduces the mortgage interest deduction from $1 million to $750,000 for homes purchased between now and 2026. It caps at $10,000 the itemized deduction that individuals and married couples can claim for state and local taxes (SALT), including income, property and sales taxes. Thirdly, it doubles the standard deduction to $12,000 for individuals and $24,000 for couples. This should more than halve the number of households who would benefit from specifically itemizing their deductions on mortgage interest and SALT.

All three reforms will likely reduce home purchases, mostly by well-heeled buyers shopping for luxury units. But that doesn’t mean they will necessarily lessen housing demand – different commentary in the bill’s aftermath suggests the market could become hotter or cooler, depending on context. And again, housing production for lower income levels will likely be influenced either way.

How the bill could lower home prices

The most intuitive consequence of the bill would be to lower home prices across the board. The White House itself predicted this several weeks before passage, in a paper by its Council of Economic Advisers.

“We project that equilibrium housing prices will experience a muted reduction of less than four percent,” read the study.

Mark Zandi, chief economist at Moody’s analytics, cited this same figure. Moody’s analysts, in response to the bill’s passage, later wrote that “the SALT change plus the higher standard deduction and tighter limit on the mortgage interest deduction also reduce the tax incentive for home ownership, which is likely to slow home construction and sales, and moderately suppress home values and property tax growth in higher-price markets.”

By “higher-price markets,” Moody’s meant rich, coastal liberal states, such as New York and California, that have many wealthy homebuyers and high tax rates. New Jersey residents, for example, have the nation’s highest average annual real estate taxes at $8,400, compared to $1,000 in various southern states. That means many residents will have large lump tax sums that they can no longer deduct. In one scenario imagined by MansionGlobal.com, someone who owns a $3 million home in the Bay Area might pay $90,000 annually in SALT. That’s a whopping $80,000 above what they can deduct under new TCJA guidelines

This is why Zandi predicts that for some counties, home prices will dip ten percent under where they’d be without the tax bill; but only dip 0.8 percent in the median U.S. county.

Lastly, TCJA will, according to the Congressional Joint Committee on Taxation, also increase federal deficits by $1.4 trillion across the decade. Zandi said this could raise interest rates, which would weaken demand by making borrowing more expensive.

What this means is that people who want to buy large homes won’t have the built-in tax advantages that have existed for decades, and made such homes cheaper. This will cool demand, presumably ending the frenzied consumer activity that inflated the housing market to begin with.

How the bill could raise home prices

But there’s a flip side to reducing this consumer activity, showing the complicated nature of the issue.

With less incentive to move into new homes, wealthy households could remain in existing ones. This would prevent turnover in the housing stock and new home construction, thereby reducing vacancy rates. Just as well, cuts to personal income taxes will leave people with more disposable income, which could inflate housing demand.

Then there’s the wrinkle added by federal credits, namely Low Income Housing Tax Credits (LIHTC). LIHTC accounts annually for $8 billion in financing for 110,000 affordable units. The more higher corporate income tax rates there are, the more those credits sell for.

“Many of the investors for the credit are corporations, insurance companies [and] banks,” said Chuck Heintzelman, principal of Milestone Ventures, an Indianapolis-based development firm. “Their corporate tax liability is a major factor in what they’re willing to pay for these credits.”\

Heintzelman, whose company builds LIHTC-financed projects across rural Indiana, said LIHTC prices had already decreased following Trump’s election, as investors anticipated tax cuts. Now that corporate rates have been slashed from 35 to 21 percent, Heintzelman said credits might have less of a return, generating less financing and fewer affordable units entering the pipeline.

But the most obvious way the tax bill could increase prices is by keeping prospective home-buyers as renters instead.

“For some homeowners, net after-tax housing costs will increase under the new law,” wrote Samantha Sharf in Forbes. “Renting may become relatively more attractive for those on the fence about becoming homeowners.”

These people would then continue renting within markets, such as major metro ones along the coasts, where competition for rental units is already high. That would increase prices.

The factors within TCJA that could alter the housing market, then, are complex, with some that will likely increase home prices, and others that could decrease them. Then there is the debate within this debate about which outcome is even good. Various pro-development interests—such as the National Association of Homebuilders —believe the specter of falling prices could bring recession. Other commentators, such as Harvard economist Ed Glaser, view lower housing prices as a good thing.

The tax bill is “a reflection of just how expensive housing has become,” he told the New York Times, “and how it feels problematic to be using the tax code to support people buying houses that are this expensive or, even worse, to be encouraging housing prices to rise further.”

For affordable housing developers, TCJA will, whether it raises or lowers prices, almost certainly increase the renter pool – and likely the need for more apartment supply. Mortgage and similar deductions have long been protected, after all, as a way to encourage homeownership. The fact these deductions are being reduced shows the federal government is shifting its priorities away from this entrenched goal.

[This article was originally published by HousingOnline.com]