INDUSTRY OUTLOOK -- Viewpoint

All the signs are pointing to a steady recovery for the Australian economy – but when and how quickly will it occur? Mortgage Business brought together five of the industry’s leading stakeholders to reveal their views on regulation, minimum volumes, and the return of the investor.

STAKEHOLDER PANEL

Kevin Arkell (KA)

Latrobe Financial

James Boyle (JB)

Liberty Financial

Steve Lambert (SL)

National Brokers Group

Damian Percy (DP)

Adelaide & Bendigo Bank

Mark Reid (MR)

Bankwest

HOW WILL THE IMMINENT REGULATION OF BROKING IMPACT THE INDUSTRY? DO YOU BELIEVE MOST BROKERS ARE NOW UP TO SPEED ON THE NEW REQUIREMENTS AND OBLIGATIONS?

DP: In terms of the industry itself, there is little doubt in my mind that we will see participants leave. There are interesting questions around what role aggregators will play in the new licencing regime – whether or not they will take a license themselves or whether they will require their members to take licenses. [It] will force broker groups and individual brokers to take responsibility and ensure they comply with the licensing regulations. I think beyond a facilitative or supportive role, a funder’s responsibility should really sit with the broker fraternity and embrace all the professionalism that goes with that.

MR: I don’t think most brokers are up to speed at the moment because we still do not know what the regulation is going to be. In any case, I believe it will result in a great amount of consolidation in the broker industry. The MFAA will play a large part in educating brokers. You currently have around 10 large aggregator companies and I think we will see that reduce to about six within 18 months. Equally, I believe education will become even more important under these new regulations and that aggregators will need to spend time with their brokers, training them and getting them up to speed.

JB: The legislation is still a work in progress, even though it has progressed quite far over the last six months. Regulation will be the icing on the cake. I believe that once it is finally implemented, almost every broker will be up to speed. It is a positive development that the industry should embrace and is embracing. We just have to wait until we have the full clarification of the regulations before we see any real movement by brokers, but I think judging from what we know will be implemented, they are already on the right path. For brokers to prepare for the new legislation, ongoing communication with industry stakeholders will be key. Stakeholders have already been very clear in their communication to the government about what is commercial and practical and that has proved to be a very useful exercise. As we move away from the consultative stage and into the implementation stage, I think communication with brokers regarding their handling of the new requirements and perhaps what can be done to help them manage the new requirements will be useful.

AUSTRALIA HAS ESCAPED THE GLOBAL FINANCIAL CRISIS RELATIVELY UNSCATHED. WHAT ARE YOUR EXPECTATIONS FOR OUR ECONOMY OVER THE COMING SIX MONTHS?

KA: Very few economists accurately predicted the current global financial crisis, so I do not believe any-one knows what is going to happen in the future. As the saying goes – a good economist is someone who has predicted three of the last 12 recessions. To get a glimpse into what the future holds, I think we need to look at the unemployment figures. Unemployment was forecast to reach 8.5 per cent. However, it seems to be stagnating at approximately 5.9 per cent – which is a good indicator that our country has weathered the GFC. If it goes up to 6.5, consumer confidence may drop which could affect our recovery. At the moment however, GDP is strong, investment is strong and moving forward, the economy is looking pretty good.

MR: I think it is dangerous to say that Australia has escaped the financial crisis. Australia has weathered the financial crisis very well, thanks to the government handouts – which were very well received. But I believe it is still too early to say that Australia has escaped the recession. The next six months will be crucial. In this time, there is going to be a greater focus on quality. The days of 95 per cent to 100 per cent LVRs are long gone and I think as the economy improves we will see banks lower their LVRs, forcing borrowers to have larger deposits at the ready.

JB: I think the words are cautious optimism. Australia has managed, so far, to stave off a technical recession. House prices and asset prices have remained relatively buoyant in contrast to other markets around the world. However, the one problem the industry has faced and will continue to face is a shortfall in housing supply against demand led by immigration and population. Australia has found itself in a fortunate position of being one of the only OECD countries that has managed to continue to grow where others have shrunk dramatically. But the worst is not over yet. The threat remains that while other global economies are in recession, the risk of ending up in the same place is high. Hopefully over the next six months we will see the markets in the US and the UK improve and the world economy move back into a growth phase. Only at this stage will we be able to declare the recession over.

MINIMUM VOLUME REQUIREMENTS WERE INTRODUCED BY A NUMBER OF LENDERS IN MID 2009. HOW HAS THE BROKING INDUSTRY ADAPTED TO THIS NEW REGIME?

DP: In my view, the global economy is incredibly fragile. I am not one of those ‘we are out of the woods yet’ people. I think the Australian economy has been very lucky and fared very well thanks to a degree of good management and good judgement. We still have a long road ahead of us and the message from the clouds is less than clear.

JB: The major banks suddenly became very popular and had trouble keeping up with demand. In order to solve that problem, they put the pressure back on the brokers in the form of minimum volume requirements – which is quite unfair. While the banks are enjoying their newfound popularity and are watching their market share grow at an incredible pace, they are forcing their third party introducer channel to meet harder requirements.

DP: As a bank, minimum volume requirements are not something we are contemplating or engaged in. That said, I have no objections to any supplier implementing minimum activity levels. Brokers are also susceptible to implementing their own minimum volume requirements. They evaluate prospective clients by looking at the amount of energy and effort they would need to put in versus the return they would get back. If the effort doesn’t match the reward, they will often not push ahead with that client – so it doesn’t strike me as being unreasonable for a funder to do the same.

MR: Bankwest has minimum volume requirements in place. Under these requirements, brokers need to lodge six applications a year and three dispersals. From a broker’s perspective, achieving the minimum volume requirements can be quite difficult. They have to offer the best product to the client yet at the same time, deliver the banks a certain number of loans. From a bank’s perspective, we see minimum volume requirements as a flight to quality rather than a measure of volume. If a broker who has not used Bankwest for some time writes a loan with us, we have found that they tend to give the customer a bad experience. That said, we are not pedantic about our volume levels. If a broker does not meet our standard, we provide them with a free education or catch-up class.

THE RATE CYCLE HAS NOW BOTTOMED OUT AND CONSECUTIVE RATE RISES ARE NOW BEING FORECAST BY SOME ANALYSTS. HOW MUCH OF AN IMPACT WILL RISING RATES HAVE ON LENDING VOLUMES IN THE NEAR FUTURE?

KA: You have to remember, we are coming off a 49 year rate low, so whatever movements the rates make should not have that much of an effect on borrowers. No one, when they are borrowing, wants to see rates go up. There are probably a lot of people that are currently weighing up whether to fix or not. We can only give advice, and we try to be as proactive as possible with our borrowers to let them know the general trends in the market. If rates go up by half a percent by mid next year, people should be able to factor that in to their repayments.

DP: I have a feeling that further rate rises will have a dampening effect on mortgage activity. There is no doubt that we will see rates rise – close to 200 basis points – within 18 months. The economy is still fragile. Consumers are clearly used to lower rates and there is a lot of talk in the market that now is a good time to buy. The amount of debt that people are carrying means that you would not necessarily need to see much in the way of a rate increase before borrowers feel the pressure – particularly in places like Sydney.

SL: The Reserve Bank has told us that these are emergency rates and they cannot be sustained at this level for long. Therefore, borrowers need to prepare for that and make sure they can afford their repayments when rates go up.

FIRST HOME BUYERS BUOYED THE MARKET FOR THE BULK OF 2009. WHICH SEGMENTS WOULD YOU EXPECT TO PERFORM THE BEST OVER THE COMING SIX MONTHS AND HOW CAN BROKERS TAP INTO OPPORTUNITIES IN THESE MARKETS?

SL: I think there is also a lot of evidence to suggest investors will start to trickle back and fill the gap left by first home buyers. The fact of the matter is, despite the doom and gloom coverage given by the press, most Australians are comfortable. I don’t think we’ll see the boom investor market of a few years ago – things won’t reach that extreme again. I think we will see the first home buyers slide away and we will see a bit more action from the mums and dads who see that rates are low, prices stable and simple expenses like petrol are affordable.

KA: I think you will see investors and second and third home buyers make a strong launch into the market. Brokers have a great opportunity to align themselves with a real estate agent and get access to their rental role. First home buyers have really captured everyone’s imagination in terms of the amount of business that has been generated. As the market matures over the next six months, there is still a real opportunity for second and third time buyers – who are in a good position at the moment due to the low interest rates – to make good buying and selling decisions. We are coming into what is traditionally a good selling season.

MR: As confidence returns, consumers are going to look at how they can best leverage their income to make more money – which will drive them towards the investment market. I think that is where you are going to start seeing the biggest activity. The best way brokers can tap into the investor market is by maintaining their pre-existing client relationships.

JB: I’d agree that we will see more interest from property investors in the next sector. The FHOG did buoy the market. Properties around the $500,000 mark had a lot of demand driving them. Investors are always looking for opportunities in the market and I think they will account for the growth in the next phase. If that proves to be true, the best way for brokers to tap into that opportunity would be to stay close to previous customers. Investors tend to buy on a fairly regular basis if they think there is good return at play.