Australia’s property sector has been spared any major fallout from the banking royal commission after the final report did not contain any recommendations which will materially impact the flow of credit into home lending.
Released on Monday, the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was scathing of practices within the banking sector and made 76 recommendations for change.
In terms of home mortgage lending, the Commission recommended that the law be changed so that borrowers rather than banks pay the fee of mortgage brokers.
As well, it recommended that mortgage brokers be legally obligated to act in the best interests of borrowers.
In its response, the Government agreed to introduce a broker interest duty for mortgage brokers.
It also agreed to make changes to mortgage broker remuneration, although it will not move to a borrower pays model until a review which will take place in three years’ time once the impact of the changes it will make can be assessed.
Nevertheless, the Commission did not make any recommendations which will impact the overall flow of credit into real-estate.
Around Australia, credit for real-estate lending has dried up amid restrictions imposed in 2017 by the Australian Prudential Regulatory Authority and pressure on banks to tighten lending standards as stories about loans being granted to those who did not have the means to meet repayments aired during the course of Commission hearings.
On a seasonally adjusted basis, the number of new loans provided for the purchase or construction of owner-occupied housing throughout Australia over the three months to November came in at 155,812 – down 7.1 percent on the same period one year earlier.
This has precipitated a downturn in markets for housing and new home construction.
Recent data has shown substantial declines in dwelling prices, building approvals and sales of new homes.
Prior to the release of the Commission’s final report, there were concerns that any overreaction in terms of new regulation could lead to further restrictions on credit provision.
Those fears, however, now appear to have eased.
Professor Warrant Hogan, a professor at the University of Technology, Sydney and former ANZ Chief Economist, said the housing market it is unlikely to feel any significant impact from the recommendations.
Whilst he acknowledges that there could be changes to mortgage broker models, Hogan says any major effect upon the credit flow arising from the Commission’s report itself and the government’s response to it was unlikely.
He points out that the Commission’s focus revolved around misbehaviour rather than the core operations of the financial system.
At any rate, Hogan points out that lending practices have already been tightened. The final report, he said, did not contain anything new which would intensify that process.
He says the more concerning issue for the property sector is the deterioration in underlying market conditions.
“There should not be a substantive impact (form the Commission) in terms of the provision of credit to the property sector,” Hogan said.
Tim Reardon, Senior Economist at Housing Industry Association, agrees.
Whilst the recommendations in respect of mortgage brokers may alter the relationship between brokers and banks, he said neither these nor any other recommendations will impact the underlying supply and demand for new homes.
“The final report was not a surprise. There was nothing outstanding that arose at the hearings that was of fundamental concern for lending for residential home building,” Reardon said.
“As a consequence, there are no recommendations in the report which will have an underlying impact on the supply and demand for new homes.”
Asked from a real-estate viewpoint what he would like to see come out of the Commission, Hogan says any improvement in responsible lending practices is welcome.
More broadly, he says those who engage in wrongdoing must face consequences.
“The clear message from this Royal Commission is that you can’t’ regulate away misconduct,” Hogan said. “You cannot use technology to stop people behaving badly.”
“It has always been the case in finance that if you try to get too heavy handed in one part of the finance system i.e. banks, then financing activity will go into other areas often referred to as the shadow banking system.
“The key theme of this is that if you want to get rid of misconduct in financial services, there needs to be a greater emphasis on prosecuting the case for any breaches of the law for any wrongdoing.
“There needs to be consequences – you lose your job, you are struck off the professional list for your career or you go to jail.”