What Royal Commission Means For Home Buyers and House Prices

The housing market has been on a steady incline for over a decade. There’s no disputing that. And even though the last 10 months has seen a small decline in house prices, they still remain high.

Australians have been looking for relief in the market for quite some time, especially first home buyers.

And one event that has dominated this year’s news may be the reason we finally see a fall in the housing market that could save the Australian dream for homebuyers — at the cost of investors and homeowners…

So what’s the event? The Banking Royal Commission.

What the findings could mean for home buyers

The interim report was handed in just days ago, and the recommendations could change the landscape of home ownership, including the stability of the housing market.

And while this wasn’t the intent of the royal commission, independent economist Saul Eslake states that dropping house prices could be part of ‘unintended consequences’ that could arise from the recommendations.


The number one issue, according to Eslake, is that banks could tighten lending. We’re already seeing this with Westpac. Tighter lending conditions could reduce the number of buyers in the market and their budgets, in turn causing a sharp downturn in house prices.

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The impact on house prices

And Eslake isn’t the only economist who believes that there could be a steep decline due to the royal commission.

Capital Economics chief economist Paul Dales also believes that we could see a downturn in the markets due to the royal commission’s findings. And he’s expecting big declines.

While he agrees that we’ve seen a small dip in the markets this year, Dales predicts that we could see ‘history record’ declines:

At the moment the trajectory is a bit worrying cause the house prices seem to be declining at a faster rate and, in our view at Capital Economics, this will eventually prove to be the largest downturn in Australia’s modern history.

He agrees with Eslake that the royal commission and the lending crackdown by the big banks could cause housing prices to slide down further. However, he also sees rising interest rates having an impact on the bottoming out of house prices.

But Dales doesn’t see the impact of the royal commission recommendations having an immediate impact. He believes that it’ll take Australians at least 12–24 months to notice a significant decline in house prices. He told the ABC:

I would have thought over the next six to 12 months is where we would, if there was going to be a big pullback in lending, that’s when we would see it and then, thereafter as and when the royal commission makes any recommendations and the Government implements them, the next six to 12 months after that.

So it’s probably going to be quite a long, drawn-out process.

And this is what I think is quite interesting — whereas in America during the global financial crisis lending was just cut off from one day to the next, banks just decided not to lend anymore, this is a slightly different situation.

I think it’s going to be a very gradual, slow grind and it won’t be as easy to see.’

The RBA seems quite content to let things play out as they have…not raising interest rates, and believing that house prices will remain steady and the decline will remain at the pace it currently is.

And what role could APRA play in the decline of house prices?

According to the ABC, investor demand is down after APRA capped investor growth at 10% per annum, however, that cap has now been removed. It also has plans to limit a popular investor loan product, interest-only lending. Eslake said that ‘Both of those measures, I think, have played an important role in reducing demand from investors, which in turn seems to be the major factor behind the slowing in the property market and the decline in property prices that’s emerged over the last 12 months’.

For potential first homeowners, Eslake believes this is the best news in 25 years. Factoring in interest rate rises and the recommendations from the royal commission, it could lead to a 20% decline in house prices. According to the ABC, he stated:

I don’t think the decline in property prices is as bad news as it’s often portrayed

For those who own property it’s obviously not a good thing, but for the growing number of Australians who’ve been locked out of the property market over the last 25 years a decline in prices of the order of 10 to 20 per cent over a two or three year period, especially if happens without any significant increase in interest rates, could be the most promising thing that’s occurred for more than 25 years.’

This week in Money Morning

In Monday’s Money Morning, Harje discussed how last Wednesday the US Federal Reserve lifted interest rates. Normally this would be a sign of a stronger US economy. But with such debt levels and dependence on liquidity, many argue it’s far too soon to be ripping the Band-Aid off just yet. People assume storing cash as their principle asset is the best way to fight a coming crisis, but it may not be the best option. If you listen to the doomsayers, we’re in for a liquidity crisis. That means cash is scarce and everybody wants it. Harje believes the best way to fight the crisis is by buying crisis-proof stocks. These aren’t stocks that don’t go down during a crisis. Usually all stocks will go down. Crisis-proof stocks just don’t go down much, rallying far quicker than most. To find out more about this, go here.

In Tuesday’s Money Morning, Harje starts with saying that if you’d put all your money in bitcoin at the end of last year you may not be happy with where its sitting right now…Harje talks about the stability and reliability of fiat currencies as opposed to cryptos, but then sites the Venezuelan Bolivar as very unstable, which shows that fiat currencies can also be unstable. For the most part however, fiat money is pretty stable. The Aussie dollar, for example, is down 7.4% on the US dollar this year. Not ideal, but it beats the Bolivar and bitcoin for stability. OK, so bitcoin and other crypto’s are not stable stores of value now, but will they ever be? Harje’s hopeful they will be…someday. To find out more, go here.

On Wednesday, Harje opened with talk of Amazon and how it’s soon to become the largest company in the world, with a market cap close to a trillion dollars, just like Alphabet Inc. [NASDAQ:GOOG]. The company is absolutely minting money. It costs very little to keep things in ship shape at Google headquarters. They also have so much cash they end up pouring billions into side projects for fun. The problem with success is that you always want more of it. Unlike Amazon, Google doesn’t exactly have a diverse range of revenue channels. Online retail is already a trillion dollar business. And as more people jump online, the industry continues to grow. To find out more, click here.

In Thursday’s Money Morning, Harje discusses people buying crypto’s and cannabis stocks are the purest speculators. They see an ever rising price and hope irrational buying continues. You shouldn’t dismiss crypto’s or cannabis though. If we focus on the former, I would go as far to say it’s one of the greatest financial innovations of our time. Sure, prices are way down. Crypto haters are using this as ‘evidence’ to pat themselves on the back. But this is not a get rich quick scheme. The value in crypto’s is their potential to save trillions of dollars’ worth of fees. Harje makes final point about keeping your wits, and while it may be fine to invest in bitcoin and pot stocks, try not to bet your whole life savings (due to the volatility). To find out more, go here.

In Friday’s Money Morning, Harje introduces Melbourne start up, Assembly Payments (fintech company) and how they want to change the world by shaving three seconds off digital payment transactions. It’s these small, but simple improvements (three seconds) that move us closer to the world bitcoin bulls pray for: a world of instant decentralised transfer. To find out more about how we could move closer to this world, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

PS: In this free report, economy expert reveals four ways you could cash in on the global infrastructure boom. Download now.

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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