Existing home owners looking to trade up are dominating mortgage activity as buyers attempt to leverage accumulated equity before property values rebound, according to AFG CEO chief executive David Bailey.
Addressing Australian Finance Group (AFG) brokers at the ASX-listed aggregator’s national conference in Melbourne on Tuesday (11 November), Bailey revealed that upgraders have surged from around 42 per cent of AFG’s flow to “closer to 50 per cent these days”, as the cooling property market, high house prices and tight borrower servicing constrain the number of new mortgagors in market.
“The big change that we’ve seen through our data is we’ve seen the upgraders come in,” Bailey said. “So they’re the customers that sit there and say, ‘Well, I’ve got equity in my house. I’ve been through this cycle before. I want to move to that suburb down the road. If I don’t move now, maybe the price will start rebounding again, and I’ll miss out my opportunity.’”
While upgraders are taking advantage of market conditions, other segments remain subdued.
Bailey suggested that despite government initiatives to attract more first home buyers (FHBs) into market, there has been little improvement in activity from this segment of the market.
“Our data says that hasn’t moved. It’s still 12 per cent of our flow hasn’t moved from that 12% for a long, long time, and it kind of makes sense,” Bailey said.
“Customers aren’t going to catch a falling knife, especially new homeowners. Why would I? Why would I buy now if your house prices are going to fall down? They’re particularly sensitive to falling house prices, particularly the first mortgage.”
Meanwhile, the AFG CEO noted that investor lending has fallen to approximately 30 per cent of flow against a long-term average of 37 per cent, though Bailey noted the segment "hasn’t been decimated at this point in time".
Refinances currently sit at 15 to 16 per cent of volume, with inquiry climbing as borrowers reassess their rates in a rising rate environment. Indeed, Bailey forecast refinancing could return to 20 to 25 per cent over the next two to three months after the summer holiday lull.
‘Ugly looking fours’ and the ‘war on success’
The divergence in borrower behaviour comes against a punishing economic environment that Bailey warned will make the next year challenging for households.
“The top line is there’s a number of fours. We’ve got some pretty ugly looking fours there sitting at the moment,” Bailey said, referencing that the official cash rate is now sitting at 4.85 per cent following its November hike, the national unemployment rate is at 4.7 per cent, and headline CPI inflation is running at 4.3 per cent.
“We’ve got cash rates, unemployment rates, and headline CPI, and all of these are confluencing together to drive an outcome, which is a recurring problem you’re all experiencing (or the majority of you are experiencing) right now, and so are your customers.”
Bailey noted that global challenges, including overseas conflicts in the Middle East and Ukraine alongside volatile international election cycles, is also driving uncertainty that flows through to domestic household essentials, such as fuel and groceries.
Domestically, Bailey hit out at shifting regulatory goalposts, warning that unpredictable policy decisions are creating an environment that penalises ambition.
“It just feels as if there’s this war on success at the moment,” the AFG CEO told broker members.
“People are trying to get ahead but we seem to be dragged back by policy and a change in position from government, which is contrary to where we thought it would be a while back. And that impacts our customers, it impacts our businesses, and which something we’ve got to work through.”
Bailey’s comments come as federal parliament prepares to vote on the final remaining tax bills stemming from the federal budget. The proposed tax treatment reforms - which include changes to how capital gains tax (CGT) is applied to businesses - have triggered significant pushback from the broking industry and business lobbies, with the Australian Industry Group this week writing to Prime Minister Anthony Albanese and Treasurer Jim Chalmers to urge a rethink on the CGT changes.
The proposal moves away from the 50 per cent CGT discount for assets held longer than 12 months to an indexation model carrying a 30 per cent minimum floor. Industry groups warn that expanding this to all assets, including shares and operating businesses, will disproportionately hurt small businesses and damage broader investment.
Bailey highlighted that the changes announced in the federal budget had also hurt AFG’s share price, as it started falling from around $2 a share before the budget, and falling dramatically on 13 May (immediately after the budget) before continue to fall over the following months to $1.25 a share in October. (Although, the share price has been climbing again in recent weeks).
“You can see the drop in the share price from about May 12-13… Now, as an executive of a listed company, that’s mildly concerning... But we are a bellwether for the mortgage market, and that bellwether for the mortgage market means that people will say, ‘I’m out of mortgages. I’m out of the residential home loans.’
“[But] what we’ve seen over the journey, is these things do return. The market will return,” he added.
Indeed, AFG holds an ambition of achieving an 8 per cent compound annual growth rate (CAGR) in settlements over the next few financial years.
It also holds ambitions to grow the AFG Securities loan book from $7.3 billion to $9 billion in FY29, with a through-the-cycle net interest margin aspiration of 120 basis points. It also intends to scale its broker equity investments to 35 partnership stakes by FY29, up from the current six.
Underscoring its technology focus, AFG also announced new AI broker technology at the conference, designed to streamline customer interactions and automate administrative workflows (covered in detail on Broker Daily).
“Our role as an aggregator is to provide the technology that enables you to compete in a new world, create that seamless customer experience, to provide that level of convenience that the future customer may be looking for,” Bailey told delegates.
[Related: Mortgage growth flatlines at Australia’s biggest banks]
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