Due to the Financial Services/Banking Royal Commission, getting a home loan could become a lot more difficult now. It’s not great news for our home loan dependent economy as it would certainly make the loan approval process longer and more arduous. While people would probably continue buying homes and the demand would still be there, it will be harder for people to obtain home loans successfully.

A major finding of the Royal Commission points out how laidback the banks have been in approving home loans. When you apply for a loan, the bank is supposed to know how much you earn and how much you spend, what kind of car you drive, where do you stay etc. However, it was found that, most home loans didn’t depend on an actual assessment of the monthly spend. They used a measure called Household Expenditure Measure (HEM) which is not a very accurate indicator of the expenses.

Now that the banks will have to use a more realistic measure of how much people can borrow, the size of the loans available will probably fall. To share an example, someone who could borrow over $800,000 under the HEM estimate could be restricted to $538,000 under a new and realistic assumption of expenses. So, it will lead to smaller home loans which will reduce people’s ability to pay for big houses. Since there would be fewer big spenders, it might lead to lower house prices or at least slower growth in the prices.

For someone who has saved up a big deposit, it won’t be a problem with the bank examining the actual expenses. If you are one of them, stern banks and lower house prices is actually a bonus for you. These restrictions shouldn’t really impact people who own their homes, unless you want to sell or refinance. Also, if you are upgrading your property, a lower price environment might act as an advantage because you will have to invest less to buy a better property.

However, it might be a bad news for the growth of the economy which depends largely on house prices. When the price of housing goes up, people go out and spend money in shops, restaurant and hotels. That makes the economy grow. When house prices fall, people cut down on their use of credit cards and try to live a more modest lifestyle. In the worst-case scenario, it could also lead to the first recession in decades.