Australia's Financial Services Royal Commission could make securing a home loan across the ditch a lot more difficult. And that could have serious consequences for New Zealand's housing market.
The inquiry into misconduct in the banking industry has been devastating.
Since commission was announced by the Australian Government last November, share prices across all the banks have slipped.
Commonwealth Bank of Australia suffered the biggest drop, falling more than 9 percent between November 29 and last week.
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Westpac was down around 7 percent while ANZ dropped more than 5 percent. National Australia Bank took the smallest hit, falling less than 2 percent.
Shayne Elliott, ANZ's chief executive officer in Australia, has warned that the royal commission will make the home loan approval process longer and more onerous.
"People are still going to buy a home, so it doesn’t change fundamental demand, but it will change the process and will probably make it harder for people to be successful in their applications," he told The Australian Financial Review.
Because the major retail banks in New Zealand are Australian owned, any changes in the Australian home loan market will inevitably have an effect on what happens in New Zealand.
Australian economist John Murphy says that many of banks use a measure called HEM (Household Expenditure Measure) for nearly three-quarters of their loans, which he argues isn't a rigorous test of applicant's finances.
"If banks start to use more realistic assumptions about how much people can borrow, it is likely the size of loans available will fall. For example, someone who could borrow over A$800,000 under the HEM estimate could be restricted to A$538,000 under a new and realistic assumption of expenses," he writes on news.com.au.
"More realistic assessments of expenses will lead to smaller home loans. Smaller home loans will make people less able to pay big bucks for houses. Fewer big spenders in turn, should lead to lower house prices, or at least slower house price growth."
In New Zealand, a tightening of lending restrictions, such as the Reserve Bank's LVR, has done the job of slowing the market, although recent easing of those restrictions has resulted in a slight uptick in borrowing activity and a resurgence in the housing market.
If the Australian banks decide to make the home loan approval process longer and more onerous, it's possible they'll apply the same restrictions to the New Zealand market.
Murphy thinks there there’s good news and bad news in Elliott's warning.
"If you’ve been diligent and saved up a good deposit, and you’re a frugal person, having the bank examine your actual expenses won’t hurt. Plus now, when you go to an auction, the guy with the million dollar pre-approval and the leased German car won’t be there outbidding you. For you, stern banks and lower house prices are a bonus," he says.
However, the Australian economy, like the New Zealand one, depends to a large degree on activity in the property market.
"Australia is one of the most home-loan-dependent countries in the world and cutting back is going to cause withdrawal symptoms," Murphy says.
Canstar general manager Jose George says it is difficult to gauge what impact the commission's findings will ultimately have on the New Zealand market but any increase in transparency is good for consumers.
However, he cautioned that the lending markets in Australia and New Zealand are quite different.
"The nature of home loans and structure of the lending books are very different here in New Zealand to that in Australia. Floating, or variable rate loans as they are known, are a lot more popular and interest-only arrangements are far more common across the Tasman than in New Zealand so I think to make any direct comparisons between the two markets would be unhelpful at this stage," he says.
