If the banks tighten credit standards in the wake of the scandalous findings of the royal commission, we could see weaker house prices for a few years as house prices are largely determined by the availability of credit, says UBS.
If the poor practices of the Australian banking sector revealed by the royal commission trigger a significant tightening of income and expenses assessments, Australia could face a 'credit crunch', says global investment bank, UBS.
UBS analysts George Tharenou and Jonathan Mott say a dramatic tightening of credit availability could trigger a recession in Australia.
Only two weeks into the royal commission, senior counsel assisting the royal commission Rowena Orr QC has already identified serious problems in the banking sector, including failure to report misconduct to the regulator, mortgage fraud, bribery, and failure to verify customer income and expenses.
Aussie Home Loans, which is owned by the Commonwealth Bank, revealed it lacked a system to detect loan fraud.
ANZ has revealed it does not check information provided by brokers about customers’ living expenses.
National Australia Bank faced allegations of bribery and fraudulent lending practices.
Westpac sold worthless insurance to some of its mortgage holders.
Tharenou said tighter mortgage underwriting standards, though "prudent", are likely to have a material impact on the economy.
The current high housing prices are largely the result of the availability of credit, not demand for housing, noted Tharenou.
A 'credit crunch' scenario could see house price fall over the period of a few years, he said.
Read more about the royal commission into the Australian banking system:
Banks scrutinised for mortgage lending practices
What will the banking Royal Commission mean for real estate?
Loyal bank customers exploited: Productivity Commission draft report