Big bank head says price drops won't pose a significant risk to the economy unless coupled with jobless spike
A steep drop in house prices will only pose a significant risk to the economy and the banking sector if it is accompanied by a large rise in unemployment, according to Westpac’s chief executive.
While Westpac is expecting house prices to drop 16% from their peak by December next year, CEO Peter King said it was rising unemployment that would be the larger threat to the Australian economy and the finance sector, according to a report by The Australian.
“I watch unemployment more than house prices,” King told the publication after announcing a drop in Westpac’s annual profits to $5.28 billion. “For us to lose money in mortgages, it’s normally someone loses their job, someone gets sick, or they get divorced … maybe income doesn’t keep pace with expenses, but we assessed all the mortgages with interest rate buffers.”
Westpac predicts the Reserve Bank’s official cash rate will peak at around 3.85%, from 2.85% currently, and that unemployment will rise to 4.5% in 2023. The RBA has hiked rates seven consecutive times this year, spurring worries about how borrowers will handle mortgage repayments, The Australian reported.
King said that despite the hefty rate hikes, consumers, borrowers and businesses were still doing well and loan losses were still low. He did admit, however, that there were long lead times on rate hikes, and that Westpac was still processing the last three hikes into monthly loan repayments.
“Credit quality in its aggregate sense, most of the metrics … are now back at pre-COVID levels,” King told The Australian.
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He said the biggest challenge for policymakers was to “contain the inflation psychology” gripping the economy.
“In Australia, consumer spending is resilient but as higher rates bite, we expect the heat to come out of the economy and inflation pressures to ease,” King said. “Small business is one sector we are watching closely as consumption slows.”
King said that while the federal budget included new initiatives on the energy transition and affordable housing, business and government would need to continue to work together on those issues.
“The first priority is actually energy transition, so we’ve got to get the investment into the electricity grid to get it less reliant on fossil fuels and continue its reliability,” King said. “In regional Australia often one of the issues is there’s not enough housing for people … affordable housing is critical.”
