How Will the Banking Royal Commission Impact the Property Industry?

The announcement this week of a Royal Commission into Australia’s banking, superannuation and financial services industry has certainly put banks’ lending practices in the immediate firing line.

Despite numerous inquiries and hearings following industry scandals, poor decisions and admitted misconduct, Malcolm Turnbull finally yielded to pressure and announced a Royal Commission to end political uncertainty for the financial services industry.

But what will it mean for Australia’s property sector?

The most immediate impact is likely to be on homebuyers and anyone with a home loan in the form of higher interest rates and a longer-term squeeze on dwelling values.

The banks, especially the Commonwealth Bank, have recently been taking a much tougher approach in their lending criteria, especially in regard to analysing borrowers’ living costs and slashing the amount they are willing to lend them.

This is perhaps seen as taking action after the horse has already bolted, as Australian household debt is currently amongst the highest in the world, no doubt caused by past lending practices which have made our banks global money-making machines and the envy of institutions overseas.

Ingrained selling incentives and commissions for lenders has meant that rules have long been broken and bent - including forged loan documentation. This will be one of the most eagerly watched aspects of the commission as real estate accounts for about 60 per cent of banks’ loan portfolios.

Australia’s big four banks underwrite about 80 per cent of all Australian mortgages with a total value of about 1.4 trillion dollars.

Australian Bankers’ Association Chief Executive Anna Bligh has warned that borrowing costs for our banks could rise with offshore lenders regarding them as riskier prospects because of the uncertainty surrounding the commission.

"This runs the risk that Australia will be seen as a more risky investment by global investors that can go anywhere. The risk is that they don't invest or suspend their investment in Australia or they put a premium on the price of those funds," Bligh said.

The commission process will also lead to an increase in regulatory costs for banks over the next 12 months, which will all be passed on to consumers in the form of higher interest rates or lower deposit rates.

Whilst the impact for the development finance sector is not thought to be great - as it is so regulated and appears to be appropriately priced, it’s the impact on the mum and dad market that has caused ripples in the industry and resulted in an immediate sell-off in financial stocks after the commission was announced.

Weak wages growth and hugely indebted households is a major concern for the Reserve Bank of Australia.

What the Royal Commission uncovers will be closely watched as no-one really knows the extent of bad lending practices caused by the demand for earnings through the recent property boom.