The borrowing capacity of Australian property investors has contracted 20 per cent over the past three years, leading UBS to forecast that major banks' housing credit growth will fall to zero by 2019-20, in line with the further rationing of credit to come.

Borrowing capacity could shrink by 30 per cent if the royal commission recommends a "more strict" responsible lending regime where banks actually have to verify living expenses using applicants' transaction records.

"We estimate that we are [one-third] of the way through the credit-tightening process for owner-occupiers and most of the way through for investors," UBS lead banks analyst Jonathan Mott writes in new research. For many investors with multiple investment properties, limits on "very high debt-to-income" not just serviceability will be the most significant constraint.

Since 2015, both investors and owner-occupiers have faced constraints on maximum borrowing capacity, Macquarie and UBS find. Rob Homer

The broker warns that as well as the squeezing on borrowing activity, the widening spread between the bank bill swap rate (BBSW) and Australia's cash rate is posing a threat to net interest margins. That spread is around 40 basis points after BBSW hit a two-year high in June. Meanwhile, the Reserve Bank has become more dovish in its guidance, chipping away at expectations for interest rate hikes in the first-half of 2019. The Australian Financial Review's quarterly survey of economists finds the Reserve Bank will be on hold for another year.

Banks appear limited to repricing loans at the margins, overhauling low-doc lending and tightening scrutiny of trailing commissions as "political sensitivities" limit the ability to pass on higher funding costs in full.