Evidence has emerged to suggest the ongoing Banking Royal Commission will impact availability of financing for house purchases. However, experts say that this is unlikely to have much effect on house prices in the long term. The real drivers of property prices are land availability, construction costs, population growth, and to a lesser extent finance access and cost
The Australian Banking Royal Commission was established last December, after years of public pressure, to investigate alleged misconduct by Australia’s financial services entities.
So far, proof of appalling behaviour by Australia’s major banks and financial planners from the past decade has surfaced, which include alleged bribery, forgery of documents, the repeated failure to verify customers’ living expenses before approving loans, and selling insurance to people who are unable to afford it.
In the aftermath of the scandals, several high profile finance executives have resigned, while shares of Australia’s major banks have all fallen at least 20% from highs reached before last May’s budget.
Commonwealth Bank, Westpac, and National Australia Bank shares are about 23% below their peak of late April 2017, while ANZ’s stock has fallen 20%.
Even as the Royal Commission goes on, tighter lending standards have already been enforced by the Australian regulator, with some self-imposed, as banks attempt to realign lending practices with responsible lending principles.
What the experts say
There has been concern that as tightening regulations reduce availability of financing, demand for property will follow suit, causing a drop in house prices. Several experts have chimed in on the matter.
JP Morgan’s Australian economics team suggests that the Royal Commission will cause slower credit growth, job losses in the finance sector and slower household consumption, which will lead to declines in house prices in the short term.
While JP Morgan believes the fallout from the Royal Commission creates short term downside risks for the Australian economy, in the long run it will leave Australia’s finance and household sectors, as well as the broader economy, on a stronger footing than is currently the case.
All else being equal, JP Morgan is of the view that this should be positive for the longer-term investment and productivity outlook.
Rachel Ong, Professor of Economics at Curtin University says that the stricter regulations are not likely to impact house prices.
“The tightening of banks’ lending standards and stricter credit controls should lead to a reduction in demand for properties.
“However, this prospect is unlikely to translate into any meaningful reductions in property prices. Property prices in Australia have remained persistently high since the early 2000s,” she says.
Brendan Coates, Fellow from Grattan Institute, says that any short term reduction in house prices is unlikely to have much of an impact.
“Tighter lending standards to reduce the amount of money prospective homebuyers could borrow would push down property prices, at least in the short-term. But the effect is likely to be modest, because banks have already tightened lending criteria in recent years,” he says.
Maria Yanotti, Lecturer of Economics and Finance, from University of Tasmania, is of the opinion that the Royal Commission is more likely to affect the supply of financial services, than demand for loans.
“As a consequence of the commission’s findings we would like to think that financial institutions will have to put in place better compliance processes and stop cost-saving or income-generating practices that disadvantage or put consumers at risk. These new processes and practices will translate into higher costs for the financial institutions, which will be passed on to consumers via higher interest rates and/or lower access to finance.
“This situation will result in lower demand from those looking to own a home, in favour of higher demand for rental housing. But the effect of higher interest rates may not be strong enough to decrease demand for property by real estate investors and businesses.
“The real drivers of property prices are land availability, construction costs, population growth, and to a lesser extent finance access and cost,” she observes.
It seems apparent that falls in property prices are unlikely to make much of an impact, or are merely confined to the short-term, giving a good outlook for investment in Australian property for investors keen to get a bargain whilst capital growth has slowed.
What are your thoughts about the impact of the Banking Royal Commission on property in Australia? Drop us a comment below. If you are interested in Australia and, particularly, Melbourne’s potential for high returns, don’t hesitate to give us a call at 3163 8343 (Singapore), 03-2162 2260 (Malaysia), or email us at info@csiprop.com!
By Ian Choong
Sources:
- https://www.businessinsider.com.au/australia-banking-royal-commission-economic-impact-jp-morgan-employment-house-prices-2018-5
- http://www.afr.com/real-estate/will-the-banking-royal-commission-push-down-property-prices-we-ask-5-experts-20180514-h102gm
- https://www.smh.com.au/business/banking-and-finance/housing-royal-commission-jitters-drag-big-banks-into-bear-market-20180613-p4zl88.html
- https://www.theguardian.com/australia-news/2018/apr/20/banking-royal-commission-all-you-need-to-know-so-far
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