Property experts have scotched fears that the banking royal commission could lead to a crash in Australia’s house prices.
The first round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry‘s public hearings uncovered story after dispiriting story about lax mortgage lending practices, dodgy credit card and car loan inducements, add-on insurance products and other easy credit offers involving the country’s banks.
Bank officials spent hours before commissioner Kenneth Haynes, offering justifications or mea culpas for their behaviour, which included ongoing commissions to fraudulent brokers.
Some analysts have suggested the information uncovered by the royal commission might prompt it to recommend tighter rules around how much money can be leant, and who can borrow it. UBS economist Carlos Cacho said restricting access to credit could impact future house price growth.
“The main change we expect out of the royal commission is that the banks are going to have to do more due diligence when it comes to complying with responsible lending,” he said.
“It really depends on how tight credit gets, and how quickly that happens. But if we do see a credit tightening, then 10 per cent is not out of reasonable bounds.”
But Wakelin Property Advisory director Paul Nugent said the exposure of banks’ lending practices and heightened restrictions on borrowing should be welcomed by all homeowners and home-buyers.
“Will the banks be required to go too far the other way and choke off lending which crashes the market? That seems highly implausible,” he said. “Any further changes to standards are likely to be measured and targeted at protecting marginal borrowers.”
He said he had no qualms about the banks facing tighter rules if the commission found lending standards had been too lax.
“It’s plainly wrong if individuals with modest and intermittent incomes are encouraged to borrow way beyond their means,” he said.
“It places undue pressure on those individuals and, if the behaviour is systemic and widespread, threatens the integrity of the property market.”
It’s plainly wrong if individuals with modest and intermittent incomes are encouraged to borrow way beyond their means
Stuart Wemyss, director of ProSolution Private Clients, agreed, saying the royal commission’s findings were unlikely to have a significant effect on house prices.
“In the main, in the past two years everyone has seen their borrowing capacity reduced by a third or a half,’’ Mr Wemyss said, adding that this had helped “save borrowers from themselves”.
He said the only real impact was likely to be felt by borrowers with little financial room to move. They include those who might have borrowed most of the purchase price for city-fringe homes before lending restrictions were tightened.
“In that case you will be stuck with your lender giving you less flexibility with renegotiating your loan,” he said.
Mr Nugent said such “marginal borrowers’’ in fringe suburbs might also see some impact on prices in their local market.
“[But] the final safeguard is the Reserve Bank. If tightening credit began to significantly affect property owners and the economy more generally, it is likely that it would cut interest rates to ease conditions,” he said.
Further, Mr Wemyss said that if borrowing became too difficult for first or low-income home-buyers, governments would have to look at other measures to deal with housing affordability.
“They might have to address affordability by changes to super, for example, and provide some access to super to bridge the gap between what you can borrow and what you can afford,” he said.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry begins its second round of public hearings in Melbourne on Monday, April 16. Questions will focus on the financial advice industry.