House price inflation will decelerate further next year, weighing on construction activity and household sentiment, as real wage and income weakness continues to hold back economic growth, according to a cautionary assessment from the closely watched economist Saul Eslake.

Bank of America Merrill Lynch's senior Australian economist says the current slowdown in house price growth will persist into 2015, despite record-low lending rates. Plans by the Australian Prudential Regulatory Authority (APRA) to toughen conditions around investor loans will also be a factor here, he says.

All this could eventually curb construction activity – one of the main drivers of non-resource growth at the moment – and trap negatively geared property investors counting on capital gains to upgrade to owner-occupiers, he warns.

"It is our view that national median dwelling-price growth will decelerate markedly in 2015," he wrote.

"This is as household income growth and sentiment remain soft, the unemployment rate rises, affordability deteriorates and the stimulatory impact of low interest rates fades."

He said the slowdown would bring house price inflation more into line with income growth and mortgage rates, calculated at between 3.5 per and 4 per cent.

APRA's macroprudential measures added "downside risk" to this calculation, as did the chances of the beginning of a monetary tightening cycle in 2016, Mr Eslake said. The cooling property market had important macroeconomic repercussions.

"The Reserve Bank of Australia for one has been extolling the role that increases in house prices have been playing in supporting both consumer spending and residential construction," he said.

"If house price growth decelerates and perhaps even declines in real terms this could weigh on consumption and dwelling investment into 2015," he said.

Mr Eslake's comments cap a week in which official data confirmed that real wages were declining, business and consumer sentiment remain subdued despite improving operating conditions and growth in lending to buy-to-let property investors is dramatically outstripping mortgages to first-home buyers.

For the first time in the 30-year history of the Australian Bureau of Statistics' housing finance series, the value of investor loan approvals in September, at $11.94 billion, was greater than the value of loans to owner-occupiers, at $11.77 billion.

Investor finance approvals have risen 68 per cent since the RBA starting cutting the cash rate in 2009.

Mr Eslake said this trend was driving a build-up of risks in the housing market, aided by the widespread use of negative gearing, which allows investors to offset interest costs against tax.

"The latest data from the Australian Tax Office for 2011-12 suggests that 19 per cent, or around one in five, Australian taxpayers is a landlord," said Mr Eslake.

"And of this, around 13 per cent of these taxpayers are taking advantage of negative gearing," he said.

This meant that 68 per cent of landlords declare an income loss on their property investments.

"Therefore these landlords are relying on capital gains to offset income losses," said Mr Eslake.

"This is a strategy subsidised by the government, but it may not be a good one if dwelling prices don't rise," he said.

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