Reserve Bank weighs in on house prices in the wake of royal commission

The Reserve Bank has warned house prices are at risk of falling if the banking royal commission ends up causing banks to restrict the amount of money they are willing to lend.

RBA minutes this week noted the high level of public scrutiny on banks that could affect household borrowing and spending.

Meanwhile RBA deputy governor Guy Debelle told an audience of chief financial officers there was a risk lending standards could be further wound in.

“This may have its largest effect on the amount of funds an individual household can borrow, more than the effect on the number of households that are eligible for a loan,” Dr Debelle said.

“This, in turn, means that credit growth may be slower than otherwise for a time.”

“To me, that has more of an implication for house price than it does for the outlook for consumption.”

Dr Debelle stressed the importance of finding out exactly how widespread the problem of lenders not assessing borrowers’ income properly had been after being exposed in the royal commission, and whether borrowers were finding it harder to service their loans.

In the past year CoreLogic figures show Melbourne house prices falling by 0.5 per cent already.

Compounding things, Dr Debelle also warned that there would be some interest-only loan periods that would expire this year pushing up mortgage repayments for those borrowers.

“While some borrowers will clearly struggle with this, our expectation is that most will be able to handle the adjustment so that the overall effect on the economy should be small,” he said.


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