Westpac is preparing for more falls in house prices

  • Slowing demand for mortgages is weighing on the banking industry’s revenue.
  • Westpac expects housing credit growth to ease to 4% next year.
  • CEO Brian Hartzer says this is putting additional pressure on banks to focus on costs.

Westpac, announcing a flat profit result of $8 billion over the full year, says slowing demand for housing credit is eating into banking industry revenue.

This is putting additional pressure on banks to focus on costs at a time when they have to maintain investment in operations, particularly technology, risk mitigation and restructuring.

“All the major banks are facing challenges,” says CEO Brian Hartzer.

“That’s no surprise given the public attention that’s been on banks and some of the issues that we have had to deal with as a sector and as individual banks.”

Westpac’s flat result was driven by two big negatives: the increase in funding costs; and remediation costs to refund customers impacted by the fee for no service scandal revealed in the financial services royal commission.

Hartzer says slowing housing credit growth is also weighing on revenue.

“We expect house prices to cool further, and investor demand to remain weak,” he says.

However, demand from first home buyers is holding up. Westpac holds about 23% of the Australian mortgage market.

Hartzer says these dynamics are likely to lead to housing credit growth easing to 4% next year, with total credit growth of 3.5%.

“With around 70% of Australian customers ahead on their repayments and delinquencies low, credit risks in the housing market currently remain low,” he says.

However, there has been a significant fall in demand for investor housing loans, leading to a price correction.

“They have been traditionally a very big part of the market,” he says.

“It’s obviously a challenge for someone who wants to sell their house right now. The price they realise might be a bit lower.

“But if you step back from it and think about the broad run up in housing we have seen over the last few years, I don’t think it’s something people should be too worried about.”

Hartzer says the outlook for the Australian economy remains positive, although there are likely to be economic headwinds in 2019, with GDP growth expected to moderate to around 2.7%.

He says consumers are likely to be more cautious in the face of flat wages growth and a soft housing market, while uncertainty ahead of a Federal election and a less favourable international backdrop are likely to weigh on business investment decisions.

“Employment growth is expected to remain solid, with continuing above-trend investment in private and public infrastructure,” he says.

“However, household income growth remains subdued and inflation is low. We expect the Reserve Bank of Australia to keep rates on hold throughout 2019.

“Growth is slowing in Europe and most emerging markets. China will be negatively impacted by the trade war with the US and official policies aimed at slowing growth in the non-bank sector.

“However as the Chinese economy tilts towards services, Australian exports of education and tourism will continue to prosper.”

Westpac has lifted its productivity savings target for next year to $400 million.

“At the same time, we are continuing to invest in technology to improve service to customers and make it easier for them to do business with us,” he says.

“We are committed to supporting our customers over the long term, and believe our service-led strategy remains the best way to create value for our shareholders.”