- Analysis
- Money
- Borrowing
- Property market
This was published 6 years ago
Will the bank royal commission damage house prices?
Cutting through the various predictions of a slump in house prices, the facts are: yes, house prices in Sydney and Melbourne are still falling but the rate of decline is also falling; and at a national level prices have now steadied.
In the biggest market, Sydney dwelling values were falling at a monthly rate of 0.9 per cent in December and January, reducing to 0.6 per cent in February and now 0.3 per cent in March, according to CoreLogic.
The market start to lose steam by the end of last year.Credit: Jenny Brown
Even before prices began to drop, the market was already losing steam. It was apparent a year before that growth rates started to ease.
If you count this as a trend, then even the Sydney market looks to be over the worst of the decline and may even end up in growth territory by the end of the year. Rightly, no one is suggesting the market will take off again - the conditions are not present for that.
But against these fairly encouraging statistics there has emerged a new wave of warnings about the continued fall in house prices due in large part to the horrifying case studies being heard by the banking royal commission.
Economists increasingly see a risk that banks will have to tighten their lending standards on mortgages thus leading to some credit constraint which, in turn, will put downward pressure on house prices.
Banks that use the Household Expenditure Measure to assess a borrower's spending could well be upgraded which would reduce credit availability.
The bear case scenario was outlined by UBS which re-ran its model using what it suggests is a more realistic expense level under which it found borrowing limits would fall by roughly one-third.
"Our scenario analysis suggests if total housing finance commitments fell by 20 per cent in FY19 then housing credit growth will slow to 0%," UBS said.
Ask a major bank executive and they will say the process of better testing a borrower’s ability to service their loan and improve the measurement of their expenditure is already in place and that automating the process produces a better outcome doing it manually.
It’s all about degrees. Banks don’t see mortgage lending falling off a cliff and they believe the Reserve Bank has strong views about supporting credit growth.
High profile economist AMP’s Shane Oliver outlined the reasons for his belief that dwelling prices will fall 5 per cent this year with further declines in the following year in Sydney and Melbourne. Headlining his list was, "a further tightening in lending standards as banks get tougher on borrowers’ income and living expense levels".
He argues that the housing boom in Sydney, in particular, was largely a factor of insufficient supply which is only now catching up with population growth.
But Oliver doesn’t see an impending crash - despite the fact that real capital city house prices are 27 per cent above their long-term trend and are at the higher end of OECD countries in terms of price-income ratio.
At the margin there are clearly some borrowers in distress but impairments on home loans are generally at very low levels.
Banking royal commissioner Kenneth Hayne could have an affect on house prices.Credit: John Woudstra
And bank executives are very fond of repeating that they build buffers into their serviceability assumptions - the first is that interest rates go to 7 per cent or more.
Such a scenario is not on the horizon.
The other factor that can trip borrowers and lenders is a significant rise in unemployment which is also not on the cards in the foreseeable future.
So it falls to royal commissioner Kenneth Hayne to decide whether there is a systemic problem with the way the banks have been calculating risk and practising their responsible lending duties.
And then it will be up to the government - in an election year - to decide whether to mandate banks to improve their act.
Being tough on the banks would be popular, but a significant fall in property values and the detrimental effect on consumer confidence would have negative consequences for the economy.