Delivering tomorrow, today?
Deloitte 2016 Mortgage Report
21 April 2016: Despite being buffeted by regulatory headwinds and economic uncertainty, the Australian mortgage market remains on track to continue its active and innovative trajectory, according to heads of lending and mortgages, brokers and fintechs.
Bursting through the $1.5 trillion mark for outstanding residential mortgages in Q4 2015, annualised lending grew by more than seven per cent in 2015. And the Deloitte roundtable of lenders expects the Australian mortgage market to continue to deliver with loan originations growing in 2016 and beyond.
Macro Market conditions
Co-author of the Deloitte Australian Mortgage Report and co-chair of the roundtable, financial services partner James Hickey said: “Loan origination is a good gauge of community confidence, and the current market fundamentals support continued growth.
- The official cash rate remains low at 2%
- Unemployment, while variable across the country, is averaging around 6%
- Inflation is at the lower end of the Reserve Bank of Australia’s target range of 2-3%.
“These fundamentals indicate the strength of the mortgage market in 2016. While the debt to income ratio has deteriorated, from around 125% in 2000 to more than 180% in 2016, this is against a backdrop of interest rates being substantially lower, with the debt burden being disproportionately shared by higher income households, most able to service the debt.”
However funding challenges and tightening regulatory requirements will pressurise growth. Scheduled capital changes have resulted in banks increasing rates to borrowers. In 2015 for the first time in many years, there was price differentiation between owner occupied and investor lending.
Graham Mott Financial Services partner and funding practice leader said: “The funding market volatility has also meant an increased cost in funding in the first quarter of 2016, which has placed further pressure on lenders to balance competitive rates to borrowers with stable returns to shareholders.”
Deloitte Global Regulatory Strategy Centre leader Kevin Nixon said: “Prudential policy will also add to the pressure on growth. Basel encourages national authorities to set standards above the minima if it is prudent for their banks and markets. In Australia, APRA does so for mortgages.
“Basel requires standard mortgages have a minimum risk weight of 35%, with discretion for national authorities to go higher, and a second weight of 75% for non-standard models. However the Government’s response to the Murray Inquiry clearly wanted banks to have ‘unquestionably strong capital’.
“So in addition to changing how mortgages get calculated, there is the potential for further pressure for banks to hold more capital overall. The round of mortgage risk weight changes at the end of last year added about 80-100 basis points equivalent of capital.”
Funding a sticky challenge
“From a systemic risk perspective, Australian banks have changed their mix of deposit funding to ensure there is greater liquidity and sustainability than in 2000,” Graham Mott said; adding that: “Sticky retail customer deposits are now highly desirable, which has meant bonus offers on many savings accounts are in excess of those being offered on term deposits.
“This year there has also been change in the deposit mix. Transaction deposits, traditionally a low earning deposit account, have grown as borrowers use interest offset accounts which have been growing rapidly. (See Fig. 3 below)
“Wholesale funding both locally and offshore is the other major form of bank funding. In the second half of 2015 and into 2016, global spreads increased, in some instances by up to 50bps.
“While this will take some time to blend into banks’ overall funding pools, particularly for the majors, it will challenge lenders like the regionals and non-banks, which are more exposed to wholesale markets for their funding, if sustained.
“Nevertheless the competition for customers means originators will continue to keep mortgage rates low and pressurise net interest margins.”
Digital is changing the game
Executive Director Macquarie Bank, Frank Ganis, said: “Digital can and will assist all aspects of the mortgage process, from distribution, and manufacturing, to servicing and pricing.
“Digitising all these key aspects of the process will assist brokers and other intermediaries access other ancillary financial products that borrowers now expect and demand. Nevertheless the real focus in the consumers’ mind is on choice, trust and convenience – key features of what intermediaries and brokers offer.”
Malcolm Watkins Executive Director Australian Finance Group, Australia’s largest mortgage broking group added: “There is increased competition coming into our market this year, particularly in the small to medium enterprise and non-prime lending markets. These will be the first places we will really see a big change in our ability to talk to a customer and offer a product and a rate very rapidly, with a very fast approval.
“However, right now the current regulatory and systems environment slows that kind of innovation. That’s why we can’t deliver tomorrow today. Not yet.”
Fintechs and brokers seek scale and add back office efficiencies
The roundtable returned a resounding vote of confidence in the broker market, with the general consensus that brokers would continue to originate more than 50% of new lending for the foreseeable future. However it was acknowledged that digital distribution would gain increasing relevance. Specialist lender, Resimac’s Luis Orp acknowledged that shift, confirming that: “We are originating 30% of our business through our digital channel which is continuing to grow.”
And AFG’s Malcolm Watkins said that while there has been a lot of focus on both the regulatory and consumer aspects of lending, he saw the real opportunity in lenders and brokers using digital to gain scale. He added that collaborating and investing in fintechs, particularly ‘reg-tech’ fintechs, would improve efficiency in the back office and allow brokers and lenders to do “twice as much volume”.
Deloitte Financial Services Partner and Fintech practice leader Chris Wilson said: “Fintech companies will also start to use their algorithmic platforms and predictive analytics to help large companies and banks with their compliance overheads.
“Fintech providers will be able to help identify front line issues, by applying different or unusual data sets to help with the decision-making. Through carefully monitored access to internal data, fintechs will assist financial institutions generate more accurate regulatory compliance reporting reducing both cost and risk.”
“Digital has not yet disrupted mortgages despite all the hype,” James Hickey said. Adding that: “Integrating digital into the mortgage process to gain efficiencies, achieve scale, and create a more collaborative environment will improve the customer experience and provide a combined opportunity for lenders, technology providers, fintechs and regulators to work together.
“The promise holds much more for tomorrow than we are seeing today.”
- Growth dynamics are solid with 5-10% growth in settlement originations expected in 2016
- Refinancers and existing owner-occupiers will continue to take advantage of low rates and first home buyers will remain challenged unless innovative solutions are developed
- Prudential policy implication on capital is pressurising prices
- The regulatory focus on investor lending has achieved its aim of containing growth in that segment
- Innovation will improve the customer experience with data individualising offers to customers
- Data will be a significant enabler, allowing for better pricing, cross-sell and servicing. The more open we are with it the more value it can create
- Regtech fintechs will forge ahead using algorithmic platforms to assist back office and compliance functions. Those providing predictive analytics will rise to the top as will collaboration between peer to peer and bank mortgage lenders.
- Brokers will remain stalwarts of the industry with more than 50% of new lending. Their greatest opportunities are broadening their value chain and integrating digital into their processes.
“Deloitte continues to support and encourage the discussion about the very important role housing and mortgages play for the Australian economy as a whole,” said Hickey.
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