Royal Comission Interim Could Affect Australia's Housing Market

Housing growth has slowed in relation to the housing regulations across the housing sector and tighter lending practices.

According to Corelogic’s October report, the release of the royal banking commission interim report could cause already tight lending conditions to tighten further.

House prices across Australia have fallen 1.4% since the royal commission hearings started in March and with its interim report highlighting further risks to property borrowers, the smart money is on further falls.

The report highlighted the inadequacy of bank's use of the household expenditure measure index – one test used to see if someone has the capacity to take a home loan – as well as hinting at a clampdown on trailing commissions, which are ongoing payments given to mortgage brokers who sell loans.

However, the commission also supported banks' rights to enforce loan agreement terms, another risk to those borrowing for property in a falling market, especially speculators.

The Property Council of Australia chief executive Ken Morrison said the interim report reinforced expectations that banks would grow more cautious in lending for property and that slower credit would inevitably have an impact on property prices.

"The view is that credit is harder to get now and is likely to get even harder on the other side of the royal commission," Mr Morrison said.

"But property has carried the economy and so as the Treasurer said, the important thing now is to be cautious about how any new regulation would have an impact on property."

Since the royal commission, the big banks have increased pricing discounts for the high quality borrowers with some discounts of up to 150 basis points from the standard variable rate. However, they have also increased pricing for interest-only borrowers and investors.

This started earlier when the Australian Prudential Regulation Authority introduced caps on lending to investor-only loans, which have now ended.

AMP Capital economist Shane Oliver said the last time house prices went down, the snowball effect was avoided because interest rates were lowered. This time it could be very different.

In line with the consensus of economists, Mr Oliver said it is unlikely the Reserve Bank will be cutting interest rates any time soon.

"They may cut next year but in the meantime you've got more supply coming onto the market which is resulting in rising vacancies and pressure on rents in some areas and then you've got the banks getting more concerned, so the regulator was obviously concerned late last year about households having excessive debt-to-income ratios and then that's been reinforced by the royal commission in the eyes of the public, that the banks have been too lax – whether they have or haven't, that's the perception."

And perception can be one of the biggest factors in the real estate market.

Despite a decrease in Australian housing prices, since the royal commission started commercial property values have increased by 1.7% in the June quarter, above the quarterly 1% increase of March, according to property index provider MSCI.