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'Fundamentals' powering house price boom: King

07:09am March 31 2021

Westpac chief Peter King in conversation with journalist Jennifer Hewett at the AFR Banking Summit. (Emma Foster) 

Westpac chief executive Peter King has labelled as “out of whack” supply and demand in the housing market, combining with record low interest rates to ignite home prices amid the broader economic recovery that continues to surprise to the upside.

Two days after the government’s historic JobKeeper wage subsidy scheme ended, Mr King said the economy was in good shape to absorb the impact following the faster than expected bounce-back driven by massive fiscal stimulus, the Reserve Bank’s actions and the banks’ loan repayment deferral programs.

“The number of people employed is back at 13 million people, and growth in core markets is picking up – home lending is picking up, business has more confidence – and so generally, things look good, although we know there are not equal outcomes (for everyone),” Mr King said at yesterday’s Australian Financial Review Banking Summit in Sydney.

Acknowledging that record low interest rates had also spurred a boom in property prices, a hotly discussed topic throughout the banking summit, Mr King said the fundamental driver of the uplift was a function of supply and demand.

“One of the ratios we look at is new listings to sales, and it's still out of whack – we're getting more sales than new listings, which basically is what's driving (property) prices,” he said.

The steep rise in house prices – the 2.1 per cent gain in February was the largest since 2003, according to CoreLogic – has quickly thrust the issue of housing affordability back into the national debate and prompted speculation the banking regulator may again step in with macro prudential tools to cool the market.

Mr King said the best way to address housing affordability was to drive supply rather than introduce macro prudential or tax measures at this point in the cycle, noting the RBA would want to see a period of sustained economic growth before lifting interest rates.

Australian Banking Association chief Anna Bligh. (Emma Foster)

In an earlier session, the Australian Banking Association’s chief Anna Bligh predicted housing affordability was likely to become a “political football” but agreed that the “fix” should target the underlying driver – demand outstripping supply – which wouldn’t necessarily be achieved by pulling macro prudential levers.

Separately, Australian Prudential Regulation Authority chairman Wayne Byres reiterated that it wasn’t its job to “target the level of housing prices, or act to improve housing affordability”, but it continued to closely monitor any loosening of lending standards.

APRA chairman Wayne Byres. (Emma Foster)

“It is a nuanced picture. There does not seem cause for immediate alarm. Nor, though, for complacency,” Mr Byres said, who oversaw the use of macro prudential tools in 2015 and 2017 to curb investor and interest-only lending – both of which haven’t yet been strong in this boom.

“Should risks materialise we have a range of tools we could employ. But it is obviously not wise to pre-commit to any course of action until we have a clearer view of the problem we are seeking to solve.”

Meanwhile, Westpac treasurer Jo Dawson said she believed international investors’ attitudes to Australian banks had been positively shaped by the country’s “world’s best” response to the COVID health and economic crises, and a similar response had emerged among the major global ratings agencies.

Ms Dawson added that the RBA’s Term Funding Facility – established 12 months ago at the height of the crisis to provide the banks with cheap funding – had been successful in helping stabilise the economy and didn’t expect a “massive refinancing cliff” in the market at its three-year maturity date.

Westpac group treasurer Jo Dawson. (Emma Foster)

Highlighting the abundance of liquidity in the system, she said Westpac’s balance sheet “construct” had changed significantly during COVID, reflecting strong growth in deposits, which provided more flexibility.

“From a Westpac perspective, what that means (is), our deposit to loan ratio has moved quite considerably over the last year,” Ms Dawson said.

“We've gone from about 73 per cent to around 80 per cent on a deposit to loan ratio – quite a big shift. We've been able to pay down some of that short term funding. So, when I think about the overall capacity we have from a refinancing perspective, (it) feels like we've got lots of levers at our disposal.”

On the outlook, Mr King said business lending was high on his agenda and, as business confidence returned, Westpac was “certainly open for business”, adding that the proposed changes to the responsible lending laws were likely to speed up the process of lending to businesses, rather than increase the amount.

He said dampened demand for business lending over the past year had been a reflection of demand rather than a tightening of credit, signalling that businesses had opted to draw down on deposits and tap into the government’s stimulus measures, such as accelerated tax write offs, rather than taking on more debt.

“We’ve still got a way to run before deposits are used up and then debt will be a way to build, provided we see good confidence and outlook,” Mr King said. “Because businesses invest to grow, so that's why this outlook is very important.”

Although Mr King was appointed to the chief executive role of Westpac at a time he had been set to retire, he said he was in for the long haul and was keen to continue his “fix, simplify, perform” strategy.

“I’m really keen to see it through, so everything from fixing our risk management to simplifying our portfolio of businesses,” he said. “I’m actually charged up about the plan we’ve got to deliver on.”

Emma Foster is a freelance writer. Previously, she led Westpac Wire and was a key contributor until December 2022. Prior to joining Westpac in 2013, she spent almost 20 years in corporate affairs and investor relations, primarily in large financial services and consultancy firms, in Australia, UK and Europe. She is also a photographer and podcaster.

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