Is the Royal Commission set to impact households?

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Australian Economy

While the Australian Banking sector has been crumpling under the paws of the Royal Commission with each day bringing insights that have gone against many big sharks in the sector (for instance, AMP Ltd and Commonwealth Bank of Australia), another impounding zone seems to be that of the households and house prices that is taking some negative influence from the ongoing investigations.

Philip Lowe, Governor of Reserve Bank of Australia has now warned that households may find it harder to get home loans and borrowing costs could be sky high as a result of the bad behavior of the banks being exposed in the Royal Commission. Further, interest rates scenario, regardless of any official hikes by the Reserve Bank, owing to the potentially lasting impact of a rise in US money market rates, along with local banking scandals can transform the mortgage market. The Governor has been noted to say that the lending standards in Australia will be tightened further in the context of the current high level of public scrutiny.

Revelations in the banking inquiry could lead to a significant increase in lending costs as regulators demand higher standards. An example has also been made by Commonwealth Bank, which was slapped with an extra $1 billion regulatory capital charge by the prudential regulator after a scathing report on its culture. The talks around the royal commission quickly turned into predicting the recommendations and regulatory responses, with the correct details on the lending requirements taking some importance.

However, this whole scenario has sparked many concerns on lending rules and whether bidders will need to head-out to auctions with reasonably less funding. With many hearings and inquiries post banking industry scandals, poor decisions and misconduct, Malcolm Turnbull finally announced the Royal Commission into financial services industry, but this seems to be impacting other areas of the economy as well with the ongoing investigations and revelations. Further, the latest data on Sydney and Melbourne witnessing a 0.4 per cent drop in median prices in the month of April is sailing with the expectations of a further downturn in the housing sector. An average borrower can get about five to six times their income in a loan, and once tighter lending standards are introduced, and higher living expenses are used, that’s probably going to fall to three to four times the income. Primarily, lenders like financial services group, MyState, have lifted the rates. For instance, MyState has increased the rates by about 20 basis points for principal and interest loans above 80 per cent loan to value ratio and all interest only loans. This with RBA’s warning of an interest rate hike sooner than expected might weigh heavily on the pockets.

Meanwhile, officials are sticking to their forecast of economic growth acceleration to above 3 per cent this year and next year. Dr Lowe said strong government infrastructure investment, rising exports and solid business conditions would boost economic growth and drive down unemployment. However, factors like weaker house prices, further regulatory tightening of credit, and continued policy uncertainty, are framing up a cautious outlook not just for housing, but the broader economy in 2018. At the same time, house price crash can still be evaded with other measures in place.


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