House prices will increase because of the new tax breaks for savings?

In a bid to encourage Australians to save more money, the Rudd Government is set to unveil a tax break for bank saving deposits.

According to the Daily Telegraph, this new scheme would offer tax concessions on savings similar to superannuation’s discount rate of 15 per cent.

This new offering is a component of the bigger suite of tax reforms to be announced as part of the Government’s response to the Henry review.

Treasury secretary Ken Henry, who delivered his review to Wayne Swan towards the end of last year, raised concerns over the punishing tax rates that savers face.

These new measures are focused on building a new savings culture in Australia, said the Daily Telegraph.

A positive side-effect of the tax breaks could be a boost of bank deposits by billions of dollars while decreasing the need for financial institutions to borrow from overseas.

The Government is optimistic that these concessions will be welcomed by Australians, especially those diligent savers who pay up to 50 per cent on interest earned from their bank deposits.

Other key reforms include a simplified process of lodging tax returns as well as a streamlining of the number of different taxes in the system. 

I think the 15% tax on savings means the housing prices will continue to rise because:

(1) People have more money to spend on buying properties.

(2) The banks will need borrow less from overseas which means the borrowing cost will be lower so that the home loan interest rate should be lower. This means the house affordability will improve. Since there will be more demands, the house prices should go up.

Please share your thoughts on this.

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