House prices dropped by their largest monthly fall since the global financial crisis in September, as a new report warns the amount home buyers can borrow could be slashed by a third if banks are forced to tighten their lending standards after the royal commission.

Figures released on Monday showed the major capital cities have not had the usual spring bounce, with Sydney house prices down 6.1 per cent from the same time last year and Melbourne prices falling 3.4 per cent year on year.

Economists have warned that house prices could fall by as much as 12 per cent from their peak from this time last year. A drop that large would turn housing into a top order issue for the looming federal election, where the Coalition and Labor will spar over housing policies - including negative gearing - in a cooling market.

For the month, prices around the country fell by 0.9 per cent in seasonally adjusted terms, the largest decline in a decade.

House prices have fallen the most in a single month since the GFC. James Brickwood

The analysis of CoreLogic figures by Capital Economics shows house prices fell by 1 per cent in Sydney and 1.2 per cent in Melbourne, and warned the full effect of tighter credit conditions and higher mortgage rates had yet to be realised.

"Our view is that house prices may eventually fall by 12 per cent, which would be the longest and deepest housing downturn in at least three decades," said chief economist Paul Dales.

Interest rates are all but certain to remain at their record low of 1.5 per cent when the Reserve Bank meets on Tuesday, and further price-falls could delay the next rate hike which is now not widely expected by the market until 2020.

Market analysts say the banking royal commission's interim report has raised the likelihood of a borrower credit crunch, with commissioner Kenneth Hayne suggesting banks had to do more to check that customers could afford their home loans.

September marks 12 months of consistently falling house prices since it's peak last year.

Banks have argued it is too hard to conduct full checks on borrowers but Commissioner Hayne gave this short shrift in his report, saying it was "not difficult" to look at a customer's income and spending on their bank statements - which are often held by the same bank they are seeking loans from.

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The commission also questioned whether front-line staff should receive commissions for selling financial products, and if senior managers and executives’ remuneration should have their pay tied to financial performance, potentially limiting the pool of loans by reducing incentives to approve them.

Shadow treasurer Chris Bowen dismissed concerns from the industry that any crackdown on bank pay structures or tougher regulation would affect economic growth.

"The idea that a poorly regulated financial services sector or the wrong bank remuneration structures is good for the economy in the long run is fanciful," he said.

Treasurer Josh Frydenberg said the interim report made it clear that the financial sector must start putting people before profits.

“My focus in responding to the final report will be on doing what is necessary to avoid the conduct in question happening again," he said.

“While at the same time, making sure whatever steps are ultimately recommended, they are implemented in a manner that does not undermine consumer and business access to financial services and credit, stability of the financial system, competition or economic growth.”

Treasurer Josh Frydenberg comments on the Banking Royal Commission interim report, which finds greed and short terms profits have been pursued over basic standards of honesty.

UBS analyst Jonathan Mott said the commissioner's final report was likely to recommend that banks conduct full income and expense verification to assess a borrower's financial position.

Mr Mott said that the royal commission raised the risk of

the current credit squeeze turning into a "credit crunch".

"We believe the Australian banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years," he said.

"We estimate that a move to full expense verification is likely to reduce maximum borrowing capacity by [about] 30 per cent."

The banks' recent tightening of expense assessments had already cut borrowing capacity by 7 to 10 per cent for owner occupiers and by about 20 per cent for property investors.

"Therefore there is likely to be a further substantial tightening in maximum borrowing capacity to come," he said.

The big four banks' shares jumped on Friday after the interim report was released with no findings, referrals or recommended charges.

But they came under pressure on Monday. Commonwealth Bank fell 1.4 per cent to $70.42, NAB fell 0.7 per cent to $27.60, ANZ fell 1.6 per cent to $27.73, and Westpac fell 1.5 per cent to $27.50, on a day when the ASX200 was down 0.60 per cent.