MONEY & MARKETS

Job losses, weaker household spending and downside pressure on house prices: JP Morgan evaluates what Australia's Banking Royal Commission could bring

MAY 15, 2018

• Australia’s Banking Royal Commission is yet to have a broader impact on the Australian economy.

• New research from JP Morgan suggests it could lead to job losses in the finance sector, slower home loan growth, downside pressure on house prices and weaker household consumption, at least in the near-term.

• Longer-term, the bank says the Royal Commission will likely deliver more positives than negatives for the Australian economy.

 

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Australia’s Banking Royal Commission is yet to have a broader impact on the Australian economy.

New research from JP Morgan suggests it could lead to job losses in the finance sector, slower home loan growth, downside pressure on house prices and weaker household consumption, at least in the near-term.

Longer-term, the bank says the Royal Commission will likely deliver more positives than negatives for the Australian economy.

Even in its infancy, Australia’s Banking Royal Commission has already left its mark.

Stock prices for some Australian financial firms have fallen sharply, several high profile finance executives have resigned and there’s now some evidence emerging to suggest its having an impact on home loan lending from banks.

And there’s likely to be further fallout to come based on what’s been seen so far.

However, to date, it’s not really had too much of an impact on the broader Australian economy with the exception of the housing market. And even then, it’s impact has been limited so far.

But will it remain that way for the economy?

No one is really sure how it will all play out, but JP Morgan’s Australian economics team, headed by Sally Auld, thinks the Banking Royal Commission will likely have a lasting impact, suggesting it will potentially lead to slower credit growth, job losses in the finance sector, slower household consumption and further declines in house prices.

“There are three main channels through which we think the implications of the Royal Commission may play out,” JP Morgan says.

“The first, and perhaps most obvious, is via tighter lending standards and slower credit growth.

Some of this has been enforced by the regulator, and some of it has been self-imposed as banks attempt to realign lending practices with responsible lending principles.

“Even in a relatively benign scenario, this would slow credit growth, cap house price appreciation and slow consumption growth.”

And, given the likelihood that the Royal Commission will lead to lenders simplifying their business models, it says growth, and as a result employment, across the finance sector is unlikely to maintain the growth rates seen in prior years.

“It is probably not too controversial to expect that aside from some changes to banking,” it says, specifically noting that the mortgage broking industry “will come under pressure”.

JP Morgan

“The finance and real estate sectors now represent 12% of GDP. Together, these sectors have been growing above their long-term trend, so some consolidation seems likely.

“We think employment in these industries could contract by 8% from peak to trough, about the same percentage decline seen at the height of the financial crisis.”

Given evidence seen at the time of the global financial crisis in Sydney and Melbourne, Australia’s finance capitals, that would not only have a negative impact on those geographic-specific economies, but also the broader Australian economy given their influence.

This table from JP Morgan shows the number of Australians currently employed in the finance and housing sectors.

JP Morgan

Adding to downside risks for household consumption, the largest part of the Australian economy at a little under 60%, JP Morgan says the tailwinds from higher house prices enjoyed by households in recent years could quickly turn to headwinds depending on the scale of house price falls.

“The culprit is more likely to be housing assets, rather than retail holdings of bank stocks,” it says.

“Housing assets represent around 55% of total household wealth. The path of house prices in the adjustment to lower credit growth will effectively determine whether the first order impact of the adjustment is felt through the banks and financial stability or through consumption.

“Our assumption is that the adjustment comes via the latter.”

Household spending, in other words.

JP Morgan

While JP Morgan believes the fallout from the Royal Commission creates near-term downside risks for the Australian economy, in the longer-run, it thinks it will leave Australia’s finance and household sectors, as well as the broader economy, on a stronger footing than is currently the case.

“There are some longer-term positives to consider,” it says.

“First, household balance sheet metrics should improve. All else equal, this should reduce the inherent vulnerability of the system to downturns.

“Second, average loan quality and loan-to-income characteristics will improve for the banks.

“Third, banks will be forced to transition away from mortgage lending towards more business lending.”

All else being equal, JP Morgan says this should be positive for the longer-term investment and productivity outlook in Australia.

Round three of the Royal Commission will begin on May 21, focusing on lending practices to small and medium-sized enterprises.