What impact will the Banking Royal Commission have on Australian property prices?

Credit: Maik Kleinert

Revelations out of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have revealed that Australia’s biggest and most trusted banks have let us down.

The commission is specifically focused on the ‘big four’ banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank – and other companies such as AMP, BT Financial, Aussie Home Loans and St George, and whether or not they’ve previously engaged in misconduct.

With the Australian property market having already entered a well-overdue period of cooling, there’s been widespread debate on what impact the royal commission will have on the nation’s property prices; some suggesting there will be little to no impact while others believe there will be quite a considerable drop in prices.

Scrutiny applied to banks’ behaviour specifically regarding lending has already brought about change: Westpac (+0.14 to 5.38), Commonwealth Bank (+0.15 to 5.37) and ANZ (+0.16 to 5.36) have all raised their variable mortgage interest rates, while NAB have chosen to keep theirs on hold at 5.24 to “rebuild the trust of customers.”

Australia has been at a crisis point for some time now, ranking as the third least affordable country for housing with people paying up to almost 13 times their annual income to purchase a new house, according to the 14th Annual Demographia International Housing Affordability Survey.

The long-term poor behaviour by the banks is centred around putting profit over people and their business model.


With property prices and the cost of living remaining historically high but the average household income remaining stagnant, millions of everyday Australians rely on banks to provide them with expert advice and assistance in entering the property market.

The vertical integration business model adopted by the major banks is a big part of the reason why such poor behaviour was allowed to occur in the first place.

The banks’ vertical business model involves selling customers both financial advice and financial products. Where the problem lies is that banks charge customers for financial advice and ensure that advice consists of purchasing their financial products, resulting in a very profitable feedback loop.

To paint a picture of just how bad these issues have become, a report published by the corporate regulator earlier this year looking at the quality of financial advice offered by the Commonwealth Bank, National Australia Bank, ANZ, Westpac and ANZ found financial advisers had failed to comply with their customers’ best interests in a stunning 75 per cent of reviewed cases.

As the banks tighten their mortgage lending products to obey responsible lending rules following pressure from the royal commission, Treasury secretary John Fraser warned the fallout could threaten economic growth.

“There is a risk that there’s an unanticipated tightening in financial conditions through reactions to the royal commission into the financial services industry,” Mr Fraser told the Senate in May.

Research from Swiss investment bank UBS predicts stricter lending will see Australian residential property prices fall more than 5 per cent in 2019, reducing the borrowing capacity of lenders by 30-40 per cent.

The research also states that a record number of new developments combined with poor housing affordability and weaker demand from foreign buyers could compound house price falls.

New data released by the Foreign Investment Review Board shows the total approved investment into residential property fell by two-thirds to $25.2 billion, with a sharp drop in demand from Chinese investors – who comprised 40 per cent of the applications – blamed for the fall.

While a drop in reduction of borrowing capacity the size that UBS has predicted would be dramatic, it’s important to realise some sort of tightening of credit supply is likely, adding further downward pressure on property prices that are already drifting lower.

Some of the world’s leading banks have become embroiled in the revelations out of the banking royal commission.


Despite expected aftershocks when the royal commission hands down its final recommendations in February 2019, historical context to similar situations is important.

The Australian property market has experienced no more than six national prices downturns of 5 per cent or more in the last 45 years – two in the past decade alone – and every time, we as a nation have made it out the other end mostly unscathed.

While some believe the fallout of the royal commission will be long-lasting and wide-reaching resulting in both price and demand for property continuing to fall, others aren’t so sure.

Rachel Ong, professor of economics at Curtin University, believes there will be no meaningful changes and that the Australian property market will remain stubbornly high.

“Theoretically speaking, [tighter lending] should lead to a reduction in demand for properties. However, this prospect is unlikely to translate into any meaningful reductions in property prices. Property prices have remained persistently high since the early 2000s,” Ong told The Conversation.

“It’s unlikely that the financial services royal commission will lead to any sudden hikes in interest rates or meaningful changes in policy settings, that have fuelled competition for property in the markets thus far. Property prices in Australia will continue to remain stubbornly high, reflecting a long-term structural problem that has been neglected by policymakers for decades,” said Ong.

Ong’s sentiments are echoed by Maria Yanotti, lecturer of economics at the University of Tasmania, who believes the royal commission is more likely to affect the supply of financial services than demand for loans and overall property prices.

“[Raising interest rates] will result in lower demand from those looking to own a home, in favour of demand for rental housing. But the effect of higher interest rates may not be strong enough to decrease demand for property by real estate investors and businesses,” said Yanotti.

Yanotti also points out that while the reputation of many of our financial institutions will be tarnished by the commission, consumers don’t have many alternative options for real estate finance.

“Real drivers of property prices are land availability, construction costs, population growth, and to a lesser extent finance access and cost,” Yannoti said.


The next six months will be decisive ones for not only the property market but the Australian economy as a whole. Years of poor conduct cannot be undone by the push of a button; it will take serious changes of policy and consistent, improved behaviour by our banks and financial institutions.

Whether property prices will fall because of the outcomes of the commission is yet to be seen. Historical evidence suggests, however, that if there is to be a drop in prices, it will be nothing that Australia won’t be able to work through and ultimately survive.