There’s a certain irony in watching the banking royal commission shutting the gate on dodgy mortgage lending, just after a two-decades-long credit boom has ended.

Bribes, forged documents, unethical commissions, and look-the-other-way lending standards are all being exposed, and the result will be that banks will be able to lend less to each customer in the years ahead.

But how much less?

Martin North, principal of consultancy Digital Finance Analytics, says his research shows tightened lending standards have already reduced the borrowing power of first home buyers by around 20 per cent.

And that’s mostly from pre-royal commission changes such as higher capital adequacy rules for banks and more rigorous ‘stress tests’ being used to assess serviceability of loans as global interest rates start to rise.

So while it’s undoubtedly good to clamp down on dodgy practices, there were forces at work that would reduce loan sizes even before Commissioner Kenneth Hayne started hauling bankers over the coals.

Mr North says that while a 20 per cent fall in borrowing power would normally reduce house prices by a similar amount – especially as investment-property buyers have also had their borrowing power reduced – that is not yet visible in the market.

In the largest and most overheated market, Sydney, we’ve seen dwelling prices falls 0.9 per cent in December, 0.9 per cent in January, 0.6 per cent in February and 0.3 per cent in March, based on CoreLogic data.

That led Fairfax columnist Elizabeth Knight to suggest last week that “if you count this as a trend, then even the Sydney market looks to be over the worst of the decline and may even end up in growth territory by the end of the year”.

Well perhaps, but most economists are lining up to forecast the opposite.

AMP, investment bank UBS and research house Capital Economics have all put out bearish forecasts, with falls expected to be 10 per cent or more peak-to-trough.

Mr North is even more bearish. He thinks that current lending restrictions, plus the tightening in lending standards that will result from the royal commission, could see first home buyers’ borrowing power fall by as much as 35 per cent from their peak.

So why aren’t we seeing that in median prices and auction results, both of which are holding up remarkably well?

The answer, he says, is that the fall in borrowing power is being disguised by generous loans or gifts from the older generation to young buyers trying to get a foot on the ladder.

A young couple on moderate wages with, say, $80,000 saved for a deposit, might previously have leveraged that up to a loan of $500,000 with a bit of messing around – “Would you say you spend $100 a week on food Mr Jones? Uh-huh. And you wouldn’t have any debt outstanding on your car now, would you … ?”

Post-royal commission that kind of nonsense will be hard to get away with and that same income and deposit might only secure a loan of $400,000.

That’s when the cavalry is typically called in, according to Mr North. The ‘Bank of Mum and Dad’ has been regularly coughing up $50,000 or $100,000 to get things moving.

C’est la vie, you might think – and pity the poor home buyer whose parents aren’t rolling in cash.

But it’s not quite that simple. Parents who don’t have idle money sitting around often remortgage their own homes to extract equity to lend or give to their kids.

In a falling market, the young home buyers end up watching their thin sliver of equity disappear, while their parent’s second-mortgage loan-to-valuation ratio gradually creeps up.

Most parents want to see their kids access home ownership in the same way they did decades ago, but many are going to face some nail-biting decisions as lending requirements tighten, and tighten, and tighten.

Do they borrow more when their offspring return to say “that desposit just isn’t enough to secure a loan”?

And how comfortable will they be handing over a large chunk of money knowing that half or more of it will go up in smoke as the market falls?

Mr North thinks that as parents face up to these realities they will be less forthcoming, and that the real impact of the credit slowdown on house prices will finally be revealed.

He expects 2019 to be the annus horribilis when Australia’s housing prices are finally seen for what they are – unaffordable and long overdue for a correction.

The above article contains general information only. Readers should seek independent financial advice relating to their specific circumstances.