The Financial Services Royal Commission was recently formed in December 2017 after significant public pressure from internal whistle-blowers and consumer groups. With the backing of a number of political parties, including the Greens, Labour, and some Nationals MPs the Royal Commission was put in place as a watchdog to ensure that the banks, especial Australia’s big four banks (Commonwealth, ANZ, NAB and Westpac), are doing the right thing by their customers.
In just a short time the Royal Commission has exposed banks and given out penalties for irresponsible actions, including false administration fees, services not rendered and risky lending.
While investigations on the big banks have caused some hits to the bank’s shares and significant fines, the banks themselves (and their profits) haven’t seemed shaken. Customers might be looking to swap to some of the smaller banks for now, but the real question is, overall, what effects (if any) will these investigations have on the property market?
There’s been a lot of talk about property bubbles and potential market crashes, which seem to have escalated now with the presence of the commission. Rumours like these have been circulating for years and they are nothing more than rumours, Australian property prices are still staggeringly high and have been since the early 2000s. Even with the recent slight decline, demand still outstrips supply.
The reason for the hype is that, on paper, there are some red flags. Australian’s hold some of the highest debt ratios in the world, with 60% of the banks assets going to mortgages. With most Australian’s using the same four big banks, it creates some speculation for unrest if these banks can’t cope with the pressure. That’s why the implementation of the commission is so vital, to clear out these problems before they get out of hand.
What changes can we expect from the Financial Services Royal Commission?
• Greater risk awareness by banks and consumers
• More balance between loan amounts and consumer income
• Better evaluations on debt repayment
• Loan calculations that include household living expenses and interest repayments.
Overall it is expected that the banks will be refusing more loan applications or offering loan sums lower than might have been given previously.
These are most certainly not newly addressed risks. The need for responsible lending was highlighted long before the Royal Commission came into play, with many of the banks phasing in changes since 2014 to tighten their lending criteria, so it’s not going to be a snap overnight change.
What the knock-on effects will be from this investigation is purely speculation. If there is an impact on the property market, it probably won’t be big or long-lasting.
The problem of the Australian property price ‘bubble’ has never sat just with the banks. There has been encouragement to overspend for decades, with incentives like:
• First Home Owners Grant
• Capital gains tax discounts
• Long-term low interest rates
• Negative gearing
These initiatives create and drive a desire to spend more, with the theory being you will see big returns through investment or future sales.
When considering property prices the real factors will continue to be the availability of property and land, surrounding facilities, population growth and construction costs.
The other important part of the future price equation is investors, both local and overseas. Australian home buyers are not the big market drivers, prices are typically set by investors, with homebuyers struggling to keep up with their fast pace. Should there be any price decrease in properties, especially in Melbourne, investors will be quick to snap up a bargain, ensuring that high demand is maintained. The demand for rental properties is climbing, as many investors are looking to start a portfolio or increase the one they already have.
There is an argument too that more Australian families will prefer to stay put, which means there will be fewer homes on the market, increasing demand and pushing prices up.
Overall it is unlikely that the Financial Services Royal Commission will have an effect on interest rates or policy settings, they are simply there to make sure the banks align with the systems and processes that are legally outlined and already in place.
If anything the Commission is creating a stronger financial structure that will stand the test of time and allow more confident lending in the future.