Will the banking royal commission push down property prices?

The Financial Services Royal Commission has exposed some irresponsible lending by Australia’s biggest banks. Some of the revelations from the commission have affected certain banks’ share prices but not their profits.

The question is whether the information brought to light by the commission will further push down property prices?

The shortfall of wages to pay for housing costs has made Australia’s household debt to GDP ratio one of the highest in the world (approximately 100%).

Another worry of this debt explosion is that mortgages account for over 60% of Australian bank assets and the banking is dominated by few large banks.

Their failure has the potential to disrupt the economy. The Australian Prudential Regulation Authority (APRA) has responded by tightening lending standards.

The royal commission will lead to a greater risk awareness in the banks and as a result a re-balancing of the amount of loans banks make compared to consumers’ potential earning and debt repayment.

APRA has made it clear in its submission to the commission that it expects banks to better reflect household living expenses and mortgage interest payments, in their calculations on how much they lend.

The effect of these changes will be that banks reject more consumers who apply for loans and offer less of them going forward.

Home buyers will then have less ammunition available in bidding for real estate which will eventually dampen house prices.

It will be interesting to see whether these changes will make houses more affordable. But much will depend on whether or not people get a wage rise.

This opinion piece is part of a longer article in The Conversation regarding whether the banking royal commission will push down property prices.

Professor Harry Scheule will discuss whether the Australian housing bubble could burst at the 2018 Finance Research Showcase on Monday 14 May. Visit the event page for more details and to register.