Westpac Shares Slide into Bear Market Territory, as Mortgage Applications Dive

Westpac’s share price (WBC: ASX) fell back 2.57% to close at A$34.50, the low of the day following the disclosure of a sharp drop in home loan applications since the federal government’s May budget curtailed property investor tax concessions. This puts Westpac shares down 11.42% since the start of the year, as markets continue to reassess the bank’s likely growth path in a structurally altered housing finance landscape.

The latest pullback puts Westpac shares officially in bear market territory, down just over 20% in two months, as markets remain concerned over the bank’s ability to sustain mortgage volume growth. The sell-off reflects a repricing of Westpac’s earnings outlook following concrete evidence that the Labor government’s May 12 budget reforms are already dampening investor appetite for property lending.

With housing credit representing roughly 60% of Westpac’s domestic loan book, any sustained volume weakness in this segment carries material implications for top-line growth and return on equity over the medium term.

What Did Westpac Report?

Westpac revealed that average monthly home loan applications fell approximately 10% to around 30,000 in April and May, marking the lowest level since the third quarter of last year. More concerning for markets, the monthly average run-rate has deteriorated further to approximately 27,000 applications since the budget tax changes were formally unveiled, pointing to an accelerated decline through the June quarter.

Head of consumer banking Carolyn McCann attributed the slowdown to a combination of higher interest rates, policy changes, and an uncertain economic outlook. The bank now expects housing credit growth for investors to decelerate sharply to 4.4% in both FY27 and FY28, down from 8.4% in FY26, representing a near-halving of growth in one of the bank’s key profit engines.

The volume decline comes as Westpac and its St.George brand have begun reassessing investor loan pre-approvals in light of the negative gearing restrictions. While the bank has not yet fully rewritten credit policy pending final legislation, the operational friction is adding to pipeline delays and borrower uncertainty.

Budget Reforms

The May 12 federal budget introduced sweeping changes to property investment taxation that took markets by surprise. From July 1, 2027, negative gearing will be restricted almost entirely to newly built properties, with established properties purchased after the cutoff losing eligibility for full negative gearing deductions against wage income. The long-standing 50% capital gains tax discount on assets held longer than 12 months will be replaced with a less generous inflation-indexed regime and a minimum 30% tax on trust income and certain gains.

The policy aims to improve housing affordability and access for first-time buyers by cooling speculative investor demand, but it has immediately triggered a reassessment of after-tax returns across the investment property sector. Westpac’s own economics team published a May 26 housing forecast update projecting that investor credit growth would slow from approximately 9.5% currently to roughly 4% by the end of 2027, a trajectory now being borne out in real-time application data.

Analysis broadly supports the view that investor loan demand will remain subdued through FY27-28, with some forecasters expecting a 3-5% near-term dip in property prices as the market adjusts. Housing turnover and transaction volumes are also expected to contract, which flows through to reduced origination opportunities for all major lenders. Bank of America recently downgraded REA Group, citing the same tax changes and their expected impact on listing volumes in FY27.

Fundamental Backdrop

The mortgage volume headwind arrives against an already challenging backdrop. Westpac’s May 5 first-half FY26 result showed net profit of approximately A$3.5 billion, roughly flat year-on-year, but the bank simultaneously slashed its Australian macroeconomic forecasts. GDP growth for 2026 was revised down to around 1.0% from 2.4%, while inflation and the Reserve Bank of Australia cash rate were both expected to remain elevated for longer than previously anticipated.

Net interest margins came under pressure during the half from intense competition and higher funding costs, while credit impairment charges rose to reflect the more challenging economic environment. The shares fell nearly 5% on the day of that result as markets digested the combination of earnings fragility and deteriorating macro assumptions.

Lending volumes had grown at a solid 7% pace for housing and business combined through the first half, but the sustainability of that growth is now in question. With the investor segment facing structural rather than cyclical headwinds, and owner-occupier demand constrained by affordability and higher rates, Westpac faces a multi-year period of subdued credit expansion that threatens to compress returns even as the bank pursues cost reduction through its UNITE technology modernisation program.

Recent housing finance data and industry surveys validate Westpac’s internal figures, showing new investor loans and average investor loan sizes declining across the sector in the most recent quarter, even before full implementation of the budget changes. Auction clearance rates have softened in key markets, and mortgage broker networks report heightened caution among property investors reassessing purchase decisions.

The sector-wide nature of the slowdown makes it difficult for markets to dismiss Westpac’s experience as execution-specific, instead pointing to a broad-based recalibration of housing credit growth expectations across all major banks. Commonwealth Bank, National Australia Bank, and ANZ are all expected to face similar volume pressures in their investor portfolios, though Westpac’s relatively higher exposure to this segment may amplify the impact on its earnings.

In Short

Westpac faces a regime shift in housing finance that extends well beyond the normal cyclical ebb and flow of mortgage demand.

The combination of structural tax policy changes, elevated interest rates, weak GDP growth, and rising credit risk creates a challenging operating environment that is likely to constrain earnings momentum through at least FY27 and potentially into FY28.

While the bank’s profitability base remains substantial and its balance sheet strong, markets are repricing Westpac shares to reflect a multi-year period of below-trend growth in its core mortgage franchise, with limited near-term catalysts to reverse the negative sentiment unless application trends stabilise or macro conditions improve more quickly than currently forecast.

Westpac were flagged as a ‘sell’ with two analysts (MPC Markets, Morgans) during this week’s share tips with risk/reward one concern.