Deloitte 2015 Mortgage Report
Let the good times roll
25 March 2015: Worth $1.4 trillion in our $5.7 trillion residential real estate market, home loans are one of Australia’s largest and most important capital markets. Given the strong tailwinds from last year’s 20% growth in loan settlements, and the current historically low interest rates, how sustainable is this level of loan origination in 2015?
The general view at the Deloitte Australian Mortgage Report 2015 roundtable of heads of lending and mortgages was that loan origination will grow between six and ten per cent this year, tempered only by rising unemployment and the impact of macro-prudential rules.
James Sheffield General Manager Proprietary Lending Support and Mobile Lending Commonwealth Bank of Australia said: “I’m more bearish than I was initially because of macro issues including Chinese growth slowing, unemployment ticking up in some markets, and global regulation increasing. There are also concerns about higher loan to value ratios and investment lending, which mean the recent extraordinary growth in NSW will slow. I think we’re driving towards a period of flatter economic growth.”
Deloitte Financial Services partner and report co-editor James Hickey said: “Before the 20% growth in 2014, there were some years where settlement volumes struggled, particularly in 2010 to 2012. So what we saw last year was largely due to pent up demand from existing home owners to upgrade, refinance or restructure.”
He said: “Settlements across Australia on a monthly basis in 2014 averaged $28 billion with a monthly record of $33 billion in December. That is the highest single monthly settlement rate on record, and a clear jump since the onset of the GFC, when settlements struggled to reach $20 billion."
Digital and fintechs changing the game
Digital and omni-channel approaches are also sharpening and disrupting traditional industry offerings. Sheffield said: “I think digital is going to impact all our businesses more dramatically than our generation understands.”
Although digital is changing the experience of mortgages, they are not yet an end-to-end solution. The roundtable consensus is that digital is critical, but mortgages are an omni-channel experience.
The Deloitte report notes that customers still gravitate to the ‘trusted’ relationships provided by brokers and are enjoying the competition among lenders for borrowers, which Hickey points out: “Is the most intense it has been for years.”
However, as Pepper Group Chief Financial Officer Mario Rehayem said: “More than 52% of mortgages written are going through a mortgage broker.” The roundtable was of the view that the broker generated share may even increase to 60%, but that the trusted face-to-face relationship will and is adapting to digital technologies.
Market and economic outlook
Hickey said: “The reason for our current low interest rates is a genuine response to the economic outlook for the country as a whole. With unemployment increasing due to shifts in business focus, property price growth is far exceeding wage growth in many markets. Affordability and debt servicing levels remain high in Australia relative to overseas benchmarks, and first home buyers are continuing to struggle to enter the housing market.
“While we may celebrate the strength in the market, we also need to be cognisant that it’s still a market with challenges, as well as opportunities.”
Housing activity data – supply-side support
Housing finance statistics show that housing-related lending was up 7% for the year to November 2014. Similar gains are being seen for residential building approvals, up 8% over the same period. Residential building activity is also up 8% for the year to September 2014. This compares to 6% for the same period to September 2013, -3% for 2012 and -5% for 2011.
Deloitte Access Economics partner David Rumbens said: “We anticipate the improvement in housing construction activity to extend through 2015 and beyond, with state governments working to reduce supply side constraints.
“However, approval for housing supply expansion also needs to go through local council approvals processes, which can take time, and many local councils continue to stand in the way of increased property construction.”
He added: “The good news from an economic fundamental’s perspective is that rising house prices are changing the ‘build versus buy’ equation.”
Financial System Inquiry
While the Reserve Bank of Australia (RBA) has commented on the current strength of investor activity in the housing market, especially in Sydney and Melbourne, it has not yet advocated new macroprudential policies to quell house prices. To date, Australia’s financial system and its current approach to dealing with systemic risk – which consists of informal discussions between the Australian Prudential Regulation Authority and the RBA, public communication and limited macroprudential powers – has proven to work well, including during the GFC.
While some countries have introduced additional macroprudential measures intended to help in the case of a ‘bubble’, Australian regulators have expressed their satisfaction with the current arrangements.
Deloitte supports the RBA’s view against a move towards a tighter macroprudential framework because:
- As seen during the GFC, systemic risk can be very difficult to predict, define and contain narrowly. To address risks in a formulaic manner is problematic and may in fact be counterproductive.
- Australia already has two bodies dealing with macro-stabilisation – the RBA (through interest rates) and the government (through policies addressing unemployment).
Deloitte Risk and Regulatory Financial Services leader Kevin Nixon said: Bad behaviour may be low probability in Australia, but it’s high impact.”
In response to the question as to whether Australia could weather a 30% house price fall Nixon said: “As a forward looking risk to the system, one of the things about the average loan to value ratio on a bank’s book for mortgages, is that it’s actually quite low in Australia because of the steady price appreciation we’ve seen, the aging of mortgages in a portfolio, and the propensity for Australian borrowers to pay down their mortgages over and above required monthly payments. So: ‘Could Australia weather a 30% house price fall?’ It would hurt, but for a lot of people it would just eat up their equity on paper, and as long as they don’t lose their jobs, they can continue to service their loans.
“Where one would become concerned on a forward basis, is where we see people en masse refinancing their mortgages against their increasing housing value so that the system-wide buffer disappears.”
- Growth dynamics are solid
- Existing borrowers will remain the source of most lending activity (as upgraders/refinancers)
- First home buyers a structural issue, but they are innovating to get into the market as first home investors
- Margins and performance will remain solid for majors
- But non-majors still challenged on margin sustainability and scale
- Technology is rapidly evolving and driving innovation and simplicity
- Omni-channel experience in the mortgage process needs to be a reality
- Digital will change the way mortgages are being offered, for lenders and brokers
- How and when to access fintechs is a key questions for majors
“If house price growth does moderate over the next few months, either by the RBA’s discussions or just running out of steam, there will be far less pressure for interest rates to rise in 2015. However at present it’s a case of ‘let the good times roll’ for those in the property market,” said Hickey.
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