How the Banking royal commission could impact property prices

Over recent years, convincing a bank to lend you money has gotten almost as easy as finding a hippo in a haystack. The Banking royal commission says our banks just haven’t been making the “reasonable inquiries” they’re obliged to, about a borrower’s finances and living expenses. And this casual approach has played a big part in the past six years of record house prices.

Digital Finance Analytics reports that 30.2% of owner occupied households are suffering mortgage stress — the highest in eighteen years. These are folks who can’t meet their loan repayments without cutting spending, racking up the credit card, refinancing, restructuring or even selling. Their stress is fuelled by the collision of rising living costs — basics like electricity, child care and school fees — with falling real incomes and wide spread underemployment. It’s a sleeping but significant problem.

This, and a range of other controversies the commission is uncovering, makes it clear banks will need to tighten their lending. Supply and demand says — if there’s less money to borrow, there’ll also be less to bid up prices. Enter a market correction/recalibration/fall/call it what you will…

But, it’s not necessarily all bad news. Grattan Institute’s, Brendan Coates, believes the effect of stricter lending standards will be modest. He says banks have been tightening since 2014. Back then APRA, with one eye on the GFC, forced them to assess borrowers’ abilities to repay loans at 7% interest, compared with approximately 4% now.

And, the silver lining will go to long suffering wannabe homebuyers. Since 2012, they’ve had to watch from the sidelines as horses bolted away at 6-10% per year.

If everything happens as outlined above, expect a Mexican standoff. There’ll be buyers wanting a hard bargain and sellers wanting a dreamy price.

Market Insights

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