The housing slump continues to deepen, gathering pace across new and existing home sales; something investors will have to keep in mind as they assess the Westpac move on St George.

Housing finance is the safest and most profitable form of bank lending, especially with all the added services for personal banking like credit cards, personal and car loans and funds management.

The banks make a lot of money out of home lending and other associated products and they have to risk the least amount of capital to do so. It’s almost money for jam, even in today’s worsening climate. Arrears are still low and overall bad loans tiny compared to the bills set aside by the majors in the March half for problem corporate loans.

But the Reserve Bank’s anti-inflation attack continues to gather strength.

It has already taken its toll on retail sales, building approvals and business confidence (which fell again in April, according to the latest survey from the NAB today) but housing finance was again whacked in March.

After falling a revised 6.8% (5.9% initial estimate) in February, the Australian Bureau of Statistics reported this morning that housing finance in March fell 5.3% from February, led by steep falls in both owner occupied and investment housing.

The number of loans taken out in March was the lowest since August 2005.

The number of owner-occupier loans secured in March fell by a seasonally-adjusted 6.1% compared to February to 59,371. The total value of housing finance fell by a seasonally-adjusted 5.3% in March to $20.202 billion.

“In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions decreased 5.3%. Investment housing commitments decreased 7.2% and owner occupied housing commitments decreased 4.4%,” the ABS reported.

The ABS said the number of refinancings of existing loans fell 6.0% in seasonally adjusted terms, another indicator of the draining away of confidence of borrowers.

The fall is five times that estimated by the market and by economists at Goldman Sachs JBWere. They were both going for a fall of 1%. Clearly they were too optimistic, which is odd for a group that has described itself as being “pessimistic” about growth and inflation.

In a comment before the figures were released, Goldman Sachs JBWere said that “Additionally, underlying finance approvals are also now rolling over as 140bp of effective tightening since last August has weighed on housing turnover and households’ willingness to take on new debt.

“Following last month’s 5.9% drop, the broader market consensus expects a moderate 1% fall. We note however that the major retail banks, which provide the bulk of these approvals, are forecasting much larger falls.”

That in turn means more pressure on the 2008 second half earnings from the banks for their home lending businesses, and means any optimism Westpac and St George may have for the merger, will have to be tempered.

There is now some doubt about the outlook for corporate earnings from the housing sector for all supplies (banks included) until well into 2009.

Before the ABS release this morning, Merrill Lynch cut its estimate of new homes to be built this year.

“The sharp rise in mortgage interest rates since November (115bp) is taking a toll on new housing demand. The marked deterioration in affordability, finance data for new construction and consumer sentiment towards new home purchase are all signalling a weaker profile for housing activity through 2008. We have downgraded our forecast for commencements to 148K in 2008 (from 155K) and to 155K in 2009 (from 165K).

And in commentary on Friday’s Monetary Policy Statement from the RBA, Goldman Sachs warned corporate earnings forecasts will come under rising downward pressure.

“In particular, we expect that the growth gap that now exists between a bearish RBA and consensus will be closed in the coming weeks, as consensus growth expectations are revised down. Our view is that this process will entail significant downgrades to Australian equity analysts’ EPS forecasts.”

That will include the banks: any earnings weakness for the banks will add pressure to the proposed merger, and add pressure on Westpac to cut costs by closing branches, sacking staff and rationalising banking infrastructure.