A lot has happened since our last outlook. The RBA has dropped the official cash rate – the first downward move in rates in over seven years – while commission cuts have continued and cross-selling is being heralded as the new hope for broker revenue. Mortgage Business has brought together a panel of industry veterans to discuss what these changes mean and what brokers can expect in the coming months.
PARTICIPANTS
Mark Haron (MHar)
principal,
Connective
Michael Rowland
(MR)
managing director of mortgages,
ANZ
Matt Lawler
(ML)
regional general manager,
NAB Broker
Brian Jones
(BJ)
managing director, Homeloans Ltd
Mark Hewitt
(MHew)
general manager of sales and operations,
AFG
Kim Cannon
(KC)
managing director, FirstMac
What is the outlook for residential mortgage lending in the coming months? Which borrower segments would you expect to see most activity in?
MHew: Consumers are definitely sitting on their hands and waiting to hear some positive news. It will take more than just one rate cut to see residential lending pick up. My personal view is that the RBA may have gone too far with rates [previously]. In hindsight, perhaps a couple of bigger rises would have been better than drawing it out. Looking forward, refinancing will continue to represent a large part of activity; it represented about 40 per cent of all loans for us last month. I would expect first home buyer activity to show the most pick up. First home buyer demand would have built up strongly as a result of high rates and high property prices. The investor market will also be an interesting market to watch. I think initially we’ll see experienced investors, with the equity and income behind them, making the move.
ML: Our outlook for next year sees residential mortgage lending slowing in growth but still in high single digits. This is however a lot lower than the five year average growth rate. Demand for property is still greater than supply so with the right conditions buyers will emerge. It is unlikely the recent round of rate reductions will be enough though and it may take more to create this movement. The investor segment is an interesting one to consider. The effect of borrowing costs that have more than likely peaked and are starting to come down, combined with the current state of rental markets, could see it pick up. Investors who choose to rent their properties can certainly expect healthy demand from renters which is likely to drive healthy income. Following the recent shakeouts in both the equity markets and a slower property market, seasoned investors who understand the opportunities of investing at the bottom of the market may find their way back into the borrowing mood.
MHar: Activity will remain flat for the rest of the year – even with the easing of rates. The September cut will not have a major impact. That said, there’s always some activity in the market. The main impact will be relief for existing borrowers however I don’t think a 25 basis point cut is likely to boost borrower confidence sufficiently to make any sectors pick up dramatically.
KC: It’s a tough one. There are not too many borrowers out there at the moment and there is a lot of pain. The investment market is still active, although there are not as many investors as there once were. Mortgage insurers are tightening their belts so a lot of first home buyers are now going to have to save more since there are fewer low-deposit loans available to them.
MR: From our perspective it all depends on the RBA’s monetary policy stance. If the RBA continues to ease the cash rate then we will see investors returning to the market in coming months. Investors have recently stayed out of the market because of high property prices but in the next quarter or two rental yields will become more attractive and we should see investment activity pick up. There is strong underlying demand for rental property out there, we just need yields to come up – which we expect they will. Our view is that it will be seasoned investors who return to the market. This segment understands the market.
BJ: Origination volumes have fallen by some 20 per cent over the past year and are most likely still going south, so the outlook is not rosy. High rates and increasing arrears act against any sudden reversal. The RBA’s signalling of lowering rates further may be the beginning of a slow process towards recovery, which may take months to be even discernible. It’s probably going to be the owner/ occupier segment that keeps the mortgage market at some level of activity in the downturn.
How has the funding environment changed over the last quarter and what is the outlook for the rest of the year?
KC: In the non-bank sector, every loan written loses money – there’s simply no point writing business until we know where the market is going. Banks really can’t afford to continue doing pro-packs. They are losing money every time and I think they will be forced to stop discounting in the future and move back to standard variable loans. Six months ago investors didn’t want to know about securitisation; now they are talking about it, at least. The next three months will be interesting; I thought more non-banks would have shut their doors by now so there must be some anticipation that things will get better.
MHar: It looks like there has been some improvements over the last few months, but I’d say that there’s little sign that there will be any major recovery ahead in the next 12 months. There’s no doubt that the non-bank sector has been hit harder than the banks, and I’d imagine that they will continue to find funding a challenge in the year ahead. We’ve also found that funding in the commercial space has become tighter; this also applies to low-doc products.
MR: The funding environment over the last quarter has been stable, albeit tough. Things haven’t got any better but they also haven’t got any worse. Major banks can raise funds at the moment, but it is at a price. Looking forward, there have been some RMBS deals of late and there are some signs that the securitisation market might open up again in the not too distant future.
What are your concerns about the impact of the Australian economy on lending volumes?
ML: The big issue is confidence. A lot of the underlying fundamentals of the economy are still very strong, but interest rates and their impact on confidence have a significant impact on lending activity. Things are tight for many households at the moment so people are a lot less confident about borrowing. It’s going to take some time for consumer confidence to get any real momentum. While it might pick up more quickly in some markets, an across-the-board improvement isn’t likely to occur for around 12 months.
MHar: My main concern is rising unemployment. Redundancies are on the increase – not only in banking and finance but in other areas as the impact of lower consumer spending hits. There will need to be further rate cuts if consumer confidence is to be renewed.
MR: We expect the current slowdown in housing finance and property sales to continue. As we move into 2009, volumes will remain restrained. There are some concerns about unemployment increasing. A major factor influencing the property market is consumer confidence, and our view is that given the current economic environment this will remain low. We don’t expect property values to drop materially and generally across Australia we don’t see a large reduction in volumes, but rather, restrained growth.
MHew: I think we’ll start to see unemployment rise and that is going to put pressure on the economy. My biggest concerns are the impact of rising unemployment and where rates will go.
Cross-selling has been pushed hard by some lenders and aggregators. Do you believe the broking sector has embraced this concept?
MHar: I don’t think that many brokers have got their heads around cross-selling yet. For those that don’t have the confidence to get straight in, they should look at bringing on a referral partner who they can pass insurance business on to. I believe that right now, cross-selling is critical for brokers’ long-term survival.
ML: There are two important phases to address here: one is cross-selling for incentives; the other is offering the client a product that is in their best interests. Some brokers are asked to cross-sell for higher commissions on the mortgages they sell. This forces the broker into a position where their motives are more aligned with the institution rather than the clients they serve. We disagree with this and believe it has the potential to erode the confidence of the consumer. A broker’s role is to make a borrower successful in achieving their home ownership goals, not to sell or cross-sell products. At NAB Broker, we don’t use the vernacular “cross-selling” as it infers the institution is inflicting the sale on the broker. We prefer the term “broadening advice” because it is the advice that is valuable to the client and is what will help them to be successful. It also reflects the nature of the relationship – that being advice, rather than transaction, based.
BJ: The broking sector has not embraced cross-selling – at best, it is the hug you give your mother-in-law. However conditions are now more conductive to this model, either in some minimalist form or robust models properly structured and supported.
A number of lenders have withdrawn either partially or completely from third-party distribution recently. What impact would a further reduction of lenders have on a broker’s value proposition?
MHew: A broker’s main value proposition is taking away the hassle of looking for a home loan, and that will never change. Macquarie’s withdrawal was really the only one of real significance; the others didn’t compromise a large part of total lending. If one of the major lenders were to withdraw then I think that would definitely have a negative impact on the broker channel, but the messages we are getting from lenders indicate they are still committed.
MR: This is an interesting question and something we have thought a lot about. Currently there are around 240 lenders in the market. Not all of these deal with brokers. Only a small number of lenders have withdrawn from the broker channel. I think a lot of broker and aggregator groups are recognising it’s not important to have a huge number of lenders on their panel. Many are using this time to really look at their panels and reduce their lenders to around five to ten. They are realising this is much easier to manage and much more conducive to positive relationships.
KC: I don’t think that it will have any major impact on brokers. There’s still a sufficient spread of products out there for brokers so the disappearance of a few lenders will have little real impact and I don’t think we’ve seen the end of it yet.
