INDUSTRY OUTLOOK -- Viewpoint

Licensing will thin down industry numbers and funding costs are set to rise but optimism about the health of the property market remains strong, The Adviser's quarterly roundtable has revealed.

LISA CLAES
ING DIRECT

ANDREW CLOUSTON
National Finance Club

FRANK GANIS
Macquarie Bank

SAM WHITE
Loan Market Group

MURRAY COWAN
Better Mortgage Management

THERE IS ONGOING SPECULATION ABOUT AN AUSTRALIAN PROPERTY BUBBLE - IS THIS A LEGITIMATE CONCERN? WHY/WHY NOT?

MC: Long term property prices are supported in Australia by several fundamental factors including ongoing population growth, increased housing demand, and historical low supply of new housing stock. However, property prices will fluctuate in the short term based on several other factors such as interest rates, household income growth and unemployment levels. Presently most long and short term fundamentals favour the property market thus the strength in the housing market of the past 12 months. There is little doubt the recent increases in interest rates coupled with the reduction of first home owner grants will place moderate downward pressure on property prices in the short term. However, it would take a major domestic economic shock to negatively impact all the fundamentals supporting the property market to result in the 30 to 40 per cent property price falls being predicted by some economic commentators.

SW: I think it's a concern in terms of pricing. In the real estate market there have always been concerns about property bubbles and I think there always will be. Fundamentally I'm not too worried about there being a bubble for a few reasons: lending policy tightened up quickly after the onset of the GFC which cooled the market. I also think there is the issue of supply and demand - supply hasn't really changed and that's underpinned the property market in terms of pricing as well.

LC: I agree there's a mixed sentiment as to whether Australia is facing a housing bubble or simply an affordability crisis, and think we need to look at the market fundamentals to determine which is correct. Latest figures show Australia has enjoyed solid population growth, strong migration, and solid employment. Added to this is positive consumer sentiment. According to ING DIRECT's financial wellbeing index conducted over the first half of this year, borrowers are comfortable not only with the size of their mortgage and repayments, but more than half are actually putting extra repayments into their mortgage to try and get it down sooner. Therefore, I see no immediate indication that Australia is facing a housing bubble.

THERE IS ANECDOTAL EVIDENCE THAT FIRST HOME BUYER ACTIVITY IS STARTING TO PICK UP - WHAT ARE YOUR EXPECTATIONS FOR THIS SECTOR, AND WHICH SEGMENTS WOULD YOU EXPECT TO PERFORM THE BEST OVER THE NEXT SIX TO TWELVE MONTHS?

FG: First home buyers far outweighed the property investor market for a substantial period of 2008/2009. We are now beginning to see the level of first home buyers trending back towards more historical levels. At the same time, there's an increased appetite from property investors. Again it is not a uniform picture across Australia, affordability of a particular city or region comes into play.

AC: The first homebuyer market was brought forward several years via the short term increase in government grants to first homebuyers - this was the right thing to do at the time - however, the result has been a lack of first homebuyers in the market in recent times. First homebuyer numbers should return to normal levels in the coming years as a new wave of first homebuyers comes through, however this will not be a flood due to supply issues that will keep housing costs at a prohibitive level for new entrants.

LC: I think when you're talking about first home buyer activity you have to consider the context in which they're being referred to. Government stimulus in 2009 brought FHB activity to a historic high, and after the stimulus figures dropped back to almost single digits [FHB market share of loan settlements]. In June and July, we saw those numbers increase slightly but it is too early to say whether this indicates a trend emerging. What we have seen is that FHBs respond directly to government stimulus measures, so when it comes to determining future activity in this sector, we will have to wait and see.

WHAT IS THE OUTLOOK FOR FUNDING COSTS OVER THE COMING SIX TO TWELVE MONTHS - ARE THEY LIKELY TO CONTINUE TO RISE?

FG: The funding environment remains challenging with the majority of Australian lenders having to go offshore for funds. We don't expect this pressure to dissipate any time soon. What is encouraging is that securitisation markets are showing some signs of life again. Though they are a long way from the highs of a few years ago, there is a healthy stream of deals coming onto the market. We are encouraged that there have been a number of issuances in the calendar year which have been well supported. This will help in terms of providing some relief to funding pressures but the problem is not disappearing.

AC: Recent events in the USA have seen a spike in unemployment registrations and a severe downturn in new home sales, combine this with the ongoing sovereign debt issues in Europe and there is simply not the level confidence in the global economic outlook to encourage investors to return to anywhere near pre GFC confidence levels. As a result, the increased margins on old debt rollovers will see average funding costs continue to rise for all lenders, including the majors.

MC: Securitisation costs continue to be higher than in past years and as banks roll over maturing debt written prior to the GFG it is inevitable that their funding costs will continue to increase unless markets return to pre-GFC levels. Unfortunately given the ongoing uncertainty surrounding housing markets the US and major European economies, it is unlikely that securitization markets will return to pre-GFC levels over the next 12 months and therefore there will be continued pressure on bank funding costs. Non-banks will have some pressure too, but not as much and much of these cost increases have already been factored into their rates.

LC: Funding costs are an issue very dear to lenders, but I can say with confidence that they are rising and will continue to rise, at least for the short to medium term. There is still some disparity, as second tier lenders were more adversely impacted [than the majors]. ING DIRECT is about to launch a securitisation program to diversify its funding sources. While this is not the cheapest funding option, it is a reasonable welcome to the mix that exists.

SHOULD CROSS SELLING BE A CORE PROPOSITION FOR BROKERS - BOTH IN TERMS OF RESPONSIBILITY TO THE CLIENT AND AS A VALUABLE REVENUE STREAM?

MC: In terms of responsibility, any risk protection insurance should be automatically presented to clients as an option when taking out a mortgage loan. The offering of other services will largely depend on the skills and experience of the broker and may be better serviced by a specialist. Mortgage brokers have extensive client bases which need to be recognised as a substantial asset which can be used to generate additional revenue via cross selling insurance, property or financial planning services. We believe that many brokers are not currently effectively utilising their client bases and as a result they are missing an opportunities to grow their businesses. With future commission levels on mortgage lending uncertain, mortgage brokers do have the opportunity to safeguard their future while at the same time genuinely looking after the interests of their clients.

FG: Clients today have significant expectations for diversified financial product offerings and they want choice. Brokers, due to the established relationship they have with their customer, are in a position to offer a variety of options to meet those basic financial needs including, protection, cash accounts, cards, etc. We believe this will benefit the borrower and is strategically important for the broker to diversify their offering and their sources of revenue.

AC: Full analysis of a client's needs, as is a brokers responsibility under new regulation, if handled correctly will naturally result in an increased opportunity for the cross sell of additional financial services products and will therefore create an additional revenue stream.

SW: I don't think the revenue argument is a reasonable or strong reason for offering cross sell. I think it's good but not a main reason for doing it. The broking industry is fundamentally about customer service and improving that customer service, which can involve offering products around loan products to ensure you service a client's needs. If you're serious about customer service and you continue to develop relationships with clients, then new opportunities to increase your revenue will naturally arise. It's good business sense to offer cross sell, but even if it wasn't, we should be doing more of it as it is part of the evolution of customer service.

HOW LIKELY IS IT THAT LICENSING WILL REDUCE THE NUMBER OF BROKERS IN THE INDUSTRY? WHAT IMPACT DO YOU THINK A REGULATED INDUSTRY WILL HAVE ON ATTRACTING NEW BROKERS?

AC: The licensing regime will have an impact on broker numbers in the short term. However, as large broker firms adjust to the new environment, and remodel their recruiting techniques from a net casting approach to targeting a skill based - and possibly a cadetship style of induction - numbers will begin to return. And the industry will be far better for it.

MC: Licensing is already resulting in brokers leaving the industry, with several of our brokers indicating that they are taking the opportunity to retire or concentrate on providing other financial services rather than apply for an Australian Credit Licence. We believe that overall industry numbers will fall by 10-15 per cent by the time NCCP is full enforced from 1 January 2011. In the long term, increased compliance hurdles and costs will make entering mortgage broking a less attractive proposition. However, large brokerage franchises and firms who have the resources to absorb increased compliance costs will have the opportunity to grow their businesses. We still believe regulation will be an long term positive for the industry as it will attract the right candidates and increase the quality of service across the lending industry.

SW: I reckon there's a significant percentage reduction in the market place. In NZ they'd gone down the path of regulating every single individual and the cost of becoming a licensee in NZ was about $8,000 with ongoing costs of around $2,000 to $3,000 each year. That had a massive impact on brokers, and brokers dropped off by half. In Australia however, the bar is set lower in terms of regulation and pricing. I think you'd be hard to find brokers who would say what is being asked for is inappropriate - I'd be surprised if we see a reduction of more than 5 or 10 per cent in broker numbers.

LC: There has been a slight diminution in broker numbers today, but this is a natural and welcome attrition. The NCCP was a catalyst for housekeeping within the industry. As a result of the legislative requirements, some dormant and part-time brokers left the industry. But I don't see a huge fall in broker numbers as a result of the NCCP because what it has open doors for new players who are keen on entering the mortgage market, as well as raise the professionalism in the industry.