Australia’s second-largest lender Westpac Banking Corp has reported a 20% decline in mortgage applications following changes to federal tax concessions for property investors, pointing to weaker demand in the housing market. 
The decline has been sharper than the fall recorded immediately after the government announced the tax changes. Westpac said investor demand for housing credit is expected to slow considerably, with growth projected to fall from 9.1% this year to 4.5% in 2027 and 4.4% in 2028. The bank attributed the weaker outlook to higher interest rates and changes in government policy. 
Total housing credit growth is also expected to slow from 6.8% this year to 4.7% next year. Westpac expects owner-occupied housing credit to provide some support, taking total credit growth to 5.2% in 2028. 
The weaker lending outlook has added pressure on Australia’s major banks, which have benefited from strong property prices and home lending. The country’s four largest banks account for more than 70% of the national mortgage market, making housing demand an important part of their earnings. 
Westpac shares fell as much as 5.9% following the update and were heading for their steepest one-day decline since April last year. Shares of Commonwealth Bank of Australia, National Australia Bank and ANZ also declined by more than 2%. 
Analysts said Westpac is facing additional pressure from expectations of a slight decline in its net interest margin, a key measure of bank profitability, next year. Jarden analyst Matthew Wilson said Australian banks were facing a difficult earnings environment because of weaker lending volumes, pressure on margins and longer-term concerns over credit quality. 
Housing activity has come under pressure since the federal government moved to restrict tax benefits available to investors purchasing established residential properties. Under the new rules, which are scheduled to take effect from July 2027, negative gearing benefits for residential investment will be limited to new builds. Existing investments made before the policy announcement remain covered by the previous arrangements. 
The government has also announced changes to the capital gains tax treatment of property investments. From July 2027, the existing 50% discount will be replaced by an inflation-linked system for most assets, while new homes will retain additional options under the revised framework. 
The policy changes have already affected investor sentiment. Mortgage brokers reported that some investors had reduced their plans to purchase established homes, while lenders began reassessing how the loss of negative gearing benefits would affect borrowers’ serviceability and borrowing capacity. 
Westpac’s latest figures show that this caution has now extended into mortgage applications. Its 20% decline is twice the fall the bank recorded in the weeks immediately after the government announced the tax changes. National Australia Bank had reported a 15% decline in mortgage applications over the preceding three months. 
Housing market activity has also weakened. Auction clearance rates have dropped to their lowest level in six years, while average property prices across Australia have declined by about 2% over four months, according to property consultant Cotality. 
Despite the softer market, Westpac CEO Anthony Miller said the shortage of housing and continued population growth could partly offset the effect of higher borrowing costs and the recent federal policy changes. Households are also continuing to deal with higher living costs. Westpac said business investment and overall customer resilience were supporting economic activity despite these pressures. 
Westpac reported quarterly cash earnings of AUD 1.8 billion, compared with AUD 1.9 billion in the same quarter a year earlier. The bank said its core net interest margin remained broadly stable during the quarter. 
Its lending and deposit books both increased by 2%, reflecting broad-based growth across its Australian operations. The bank’s common equity tier 1 capital ratio stood at 12.1%, leaving it comfortably above regulatory requirements and providing flexibility on its balance sheet. 
The latest housing figures come as Australia’s banking sector faces a combination of policy changes, borrowing-cost pressures and softer property activity. At the same time, the structural shortage of housing remains a factor supporting underlying demand. For the property market, the immediate impact is likely to be more visible among investors, particularly those considering established homes. New-build properties retain negative gearing ben 
Source Reuters