A capital gains tax could have the opposite effect on house prices that the Government wants, research suggests.

A capital gains tax would push up house prices as well as significantly increasing rents, according to economic modelling commissioned for the Tax Working Group.

The inconvenient finding was included deep within one of 40 "background papers" released alongside the Tax Working Group's interim report last week, and threatens to make a wider tax on capital gains a harder sell for Labour.

It provides ammunition for property investors who claim extending taxes on capital gains would hurt rather than improve overall housing affordability.

The study was commissioned by the working group's secretariat from Otago University economics professor Andrew Coleman and Andrew Binning, an economist working for the Treasury.

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Their modelling suggests a "modest" increase in house prices from a capital gains tax.

That runs counter to a Westpac study published in June that suggested a broad-based capital gains tax could eventually reduce house prices by as much as 10.9 per cent.

TOM PULLAR-STRECKER/STUFF Sir Michael Cullen said economic modelling suggested house prices would fall with a capital gains tax, but that was not the finding of research that was funded for the Tax Working Group.

Tax Working Group (TWG) chairman Sir Michael Cullen has said a capital gains tax could in theory be expected to increase rents while reducing house prices for owner-occupiers, but has questioned whether the effects would be significant.

Coleman and Binning's findings were not spelt out in the TWG's interim report itself, which instead said "it may be expected that rents will rise over time, and house prices will be lower, relative to the status quo".

Their study indicated that taxing capital gains was likely to increase rents to the point where it would be cheaper for many young people to buy property if they could.

Because young people often share houses that they rent – but are less likely to share homes they own – that would unlock extra demand for housing, the researchers said.

"Paradoxically, this increase in the total demand for housing could increase house prices. The model in this paper suggests ... a modest increase in house prices," they concluded.

123RF Accommodation supplements for low-income earners could be increased to offset an expected increase in rents from the taxation of capital gains, the Tax Working Group has suggested.

The TWG secretariat agreed the study suggested house prices would increase "slightly" with the adoption of a capital gains tax.

"From our understanding of the model, this is driven by the fact that rented housing typically has more people per dwelling than owner-occupied housing," they confirmed.

"When fewer houses are rented, this means that more houses in total are required which puts upward pressure on property prices for all housing."

The officials indicated that the model Westpac had used to show a likely fall in house prices had been less sophisticated than the research they had commissioned from Coleman and Binning.

However, the TWG secretariat nevertheless downplayed the taxpayer-funded study.

STUFF House prices changes have closely tracked net migration, data suggests.

"The modelling is useful in drawing out more sophisticated channels by which tax changes can affect prices and rents," it said.

But the officials said they did not consider that the forecast increase in house prices, in particular, was "a precise, or even accurate, reflection of what is likely to happen in the real world".

The TWG's interim report said rents should be monitored if the Government increased the taxation of residential property in any way.

It suggested increased accommodation supplements for low-income earners might need to be considered.

The TWG is due to finalise its review of New Zealand's tax system and decide whether to recommend more taxation of capital gains by February.