The New Zealand housing market is cooling faster than expected and could take some pressure off bank funding costs, says Westpac NZ chief executive David McLean.
"The Auckland market has cooled quite quickly and we now expect it to remain flat for the rest of the year," McLean said. "We're also expecting price growth nationally to slow more than previously expected - to 3 or 4 per cent - or about half what we were previously forecasting."
High house price growth was not good for the economy in the long term so a slow-down, without a crash would be a good result, he said.
Real Estate Institute and Quotable Value price measures have showed that prices in previous hotspots such as Auckland, Hamilton and Tauranga had been flat for about six months.
"We're seeing that through our business," McLean said.
Banks' ability to fund lending during the housing boom has been under pressure because international borrowing costs have risen and locally deposits have not been sufficient to make up the shortfall.
That's seen their margins fall and put upward pressure on mortgage lending rates despite New Zealand's official cash rate being stable.
Westpac New Zealand delivered a flat half-year result while it's Australian owner delivered a A$4.017 billion ($4.31b) cash profit.
Westpac New Zealand made cash earnings of $462 million in the six months to March 31, up 2 per cent from $452m in the same period the previous year.
Its net operating income fell 1 per cent to $1.08b, driven by increasing pricing competition for deposits, impact from a reduction in the amortisation period for deferred acquisition costs and lower mortgage break fees.
The bank's loan book in New Zealand was up 7 per cent to $76.5b compared to the six months to March 2016, but only grew 2 per cent compared to the six months to September 2016.
While its deposits were up 3 per cent to $56.8b compared to the same prior period, they were down 1 per cent compared to the six months to September 2016.
Westpac's net interest margin fell 22 basis points to 1.96 per cent, while its operating expenses rose to $468m.
The "front of the war" had moved, McLean said, with the competitive landscape now very much about deposits as opposed to lending.
A combination of rising wholesale funding costs offshore and new Australian Prudential Regulation Authority (APRA) rules round capital ratios had driven the shift, he said.
"We would expect to see that settle down over time as the refinancing tasks are completed."
McLean said he was sceptical of the banking sector's ability to drive investor demand into deposits while there were still much higher yields in equities and other asset classes.
The returns were still quite different and so investors would ultimately be driven by long-term trends as central banks lifted base rates.
That made it difficult to grow the overall "deposit pie", he said. But deposit customers could still expect to see rates gradually move up as base rates rose and competition pushed margins.
Meanwhile, it was likely that homeowners faced another three to six months of upward pressure on retail mortgage rates as bank's adjusted to the new environment, he said.
That was despite economists forecasting the official cash rate would not move for at least a year.
Banking expert and Massey deputy pro vice-chancellor Claire Matthews said results for the three major banks that had reported in the past week (ANZ, BNZ and Westpac) showed they were turning a profit and she questioned their decision to put costs on the consumer.
"Given that they seem to be making lots of money you kind of wonder why," Matthews said. "It's not very helpful from a PR or publicity perspective to be talking about their reasonably good profits and then be talking about charging people more money."
- Additional reporting Tamsyn Parker, Francis Cook