Buying sentiment and clearance rates have dropped in the housing market: Westpac’s Peter King

The housing market is already adjusting to rising interest-rate expectations, according to Westpac boss Peter King.

Westpac, led by Peter King, has reported a 12 per cent drop in interim cash profit to $3.1bn, hit by competition and soured loans. Picture: Jane Dempster

The housing market is already adjusting to rising interest rates, as buying sentiment weakens and turnover and clearance rates drop, Westpac chief executive Peter King has said.

Announcing $3.1bn in half-year cash earnings, up 71 per cent from the previous half, Mr King also warned that the bank’s assessment of borrowing capacity for customers would likely tighten as a result of inflation-fuelling higher expenses.

“I don’t think it will be material,” Mr King said.

“(But) if I look at the sentiment survey for the time to buy a house, it’s dropped pretty low so people are already adjusting.”

Westpac has forecast that house prices will fall two per cent in 2022, accelerating to an eight per cent decline next year.

With the bank expecting the cash rate will hit 2.25 per cent next year, Mr King said a greater share of borrowers’ income would be spent on housing, either through rent or mortgages. The average size of a new home loan, he said, was about $500,000, with a two percentage-point increase in variable rates equating to $10,000 in after-tax income.

“So that’s what people have to be thinking about and getting prepared for, and the way money is spent in the broader economy is probably going to change,” Mr King said on Monday.

“Depending on what kind of rate cycle we’ll see, there may be less income available for other discretionary spending.”

While the cash profit was up on the preceding half, it fell 12 per cent compared to a year ago, as the half-year dividend was raised 3c to 61c. The decline was mostly due to competitive pressure on the net interest margin and a $139m impairment charge after a $372m benefit a year ago.

The market liked the result, driving shares up 77c, or 3.2 per cent, to $24.60, as Westpac renewed its commitment to $8bn in annual expenses and slashed costs by more than its revenue decline. Westpac said costs would be up to 2 per cent lower in the second half.

The result, according to UBS, was a “solid beat” of consensus estimates, but analyst John Storey questioned whether it was enough to convince investors that aggressive cost targets could be delivered, particularly after ANZ and National Australia Bank abandoned their commitments last week.

Mr King defended Westpac’s emphasis on cost reduction, even though its rivals have tipped the balance in favour of investment in growth opportunities.

Westpac, he said, was in a different position to ANZ and NAB, with a bloated annualised cost base of more than $10bn. Costs fell 10 per cent from the previous half to $5.2bn, excluding notable items, as the bank axed 4000 jobs.

The intention was to execute three big moves – simplification by selling non-core businesses, which was progressing, reducing customer remediation costs, and spending less on an expensive overhaul of risk management required by the prudential regulator after the Austrac debacle.

“How we do it is important, and we’re going to drive it through digital efficiency,” Mr King said.

While there was progress on costs and momentum in the business and institutional banks, the net interest margin got crunched from 1.98 per cent six months ago to 1.85 per cent, ignoring volatile treasury and markets.

The problem mostly related to intense competition in the mortgage market where Westpac still faces challenges. Mortgages lifted by three per cent but the margin collapsed by 25 basis points due to competition and a higher share of less profitable, fixed-rate lending.

There was growth in the owner-occupier portfolio, partly offset by an investor book which continued to shrink.

Cash earnings, in the consumer bank – Westpac’s biggest division – fell by eight per cent to $1.6bn from the second half of 2021.

While the group exit margin for March 2022 eroded to 1.68 per cent, Westpac said the outlook was brighter.

Rising interest rates would help, with the cash rate forecast to increase from 0.35 per cent to 1.75 per cent at the end of this year, and the swing to fixed-rate mortgages had reversed to a point where they again accounted for only 20 per cent of new flows.

Last week, all the major banks passed on the Reserve Bank’s 25 basis-point rate hike in full to their customers.

Mr King said the bank was making “steady” progress towards its goals.

“We’re investing in improving the customer experience, focusing on making customer service easier and faster, accelerating digital, and building on our banker expertise and capability,” he said.

“Financially, the group’s results have improved.

“Cash earnings were higher over the previous half, including a material reduction in notable items.”

Asset quality, he said, had improved and most measures of credit quality were back to pre-Covid levels, but provisions were lifted due to supply chain issues, inflation, expectations of higher interest rates and recent floods.

Overall, however, revenue was down three per cent on the previous half and eight per cent compared to a year ago.

Mr King said Westpac had completed the sale of two more businesses and plans to exit its remaining non-core businesses were on track.

“The next big step is exiting super and platforms and we are well progressed,” he said.

Originally published as Buying sentiment and clearance rates have dropped in the housing market: Westpac’s Peter King