Treasurer Peter Costello sees a further dampening of the market and a slowdown in the wealth of households, but is confident of a soft landing The Australian government's budget, announced last week, might be good for the country's higher income earners and the superannuation industry but it is unlikely to provide much of a boost for the property market. Treasurer Peter Costello, the architect of the government's economic policy, was quite open about the budget's impact on the property market when he predicted a bleak outlook for house prices. Mr Costello foresaw a further dampening of the market, compounded by a 'substantial slowdown' in the wealth of Australian households. Rental yields were still very low, he said, 'suggesting that house prices may fall further in real terms' but there would be a soft landing, with the 'current housing market unwinding in an orderly manner'. Mr Costello also said the number of people investing in property would fall by 2 per cent over 2005-06. 'Dwelling investment fell in the second half of 2004 and forward indicators of activity, such as dwelling approvals, suggest that this modest downward trend will continue,' he said. Mr Costello pointed to the lower number of monthly finance commitments for the construction and purchase of new houses by owner-occupiers, which is down 15 per cent on the peak reached in October 2003. According to the Housing Industry Association, cooling demand among Australia's new homebuyers led sales down 0.8 per cent in March. Another potential impact of the budget, although denied by Mr Costello and Prime Minister John Howard, could be renewed upward pressure on interest rates. The budget includes A$26 billion ($153.4 billion) in tax cuts over four years, A$22 billion of that coming in personal tax cuts which could add to inflationary momentum and cause the Reserve Bank of Australia (RBA) to reconsider its interest rate stance. The RBA raised official interest rates to 5.5 per cent in March, a move that pushed mortgage rates to their highest level in four years. The government claims the tax cuts will not be inflationary, as they are backed by a hefty budget surplus, but economists are not unanimous in agreement. The budget was also criticised by the Real Estate Industry of Australia (REIA), which said it was concerned that the government's vision for Australian retirees 'does not place sufficient value on home ownership'. The budget slashed government surcharges for superannuation contributions for higher income earners, but the REIA called for housing to become a factor in superannuation and retirement policy. 'It is time for government policy to formally include home ownership as the fourth pillar of self-funded retirement,' said REIA president Ian Wells. 'Housing affordability is still very poor, despite some recent minor improvements due to a softening in residential prices.' Market forces, however, could improve the outlook for affordability - although investors seeking some of the capital gains of the recent bull market are likely to be disappointed. According to research group Australian Property Monitors (APM), vendors slashed house prices in March in most Australian capital cities to attract buyer interest. APM said the average discounting of listed house prices across the nation jumped to 7.3 per cent in March, up from 6.9 per cent in February. Brisbane and the adjacent Gold Coast area, which have held up well as other regions have slipped, succumbed to some of the sentiment with prices discounted by more than 8 per cent in both areas. In Sydney, where the market was one of the first to slow, vendors slashed prices by 7.5 per cent. Auction clearance rates also continued to be sluggish in Sydney.