One factor that “justifies” high real estate price is the very favorable tax treatment – tax deductibility on interest and property tax, and capital gain tax exemption for the first $250K/$500K. No other asset class enjoys this much tax benefit! In California, proposition 13 further strengthens a homeowner’s hand. In an inflational environment, no other asset compares to a home.
But if price starts to decline, some of these benefits will become less meaningful (capital gain). How does prop 13 work in a declining price environment? Do you get to adjust your property value downward and pay less property tax?
Also, if price starts to decline, it’ll reduce people’s tendency to “stretch” to buy a home… by then, the only motivation is a shelter, a home; not an investment.
