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Mortgages 2018: The ‘Customer-in-Control’ future
Deloitte Australian Mortgage Report 2018
5 July 2018: Australia’s leading lenders and mortgage brokers predict the nation’s housing settlement volumes will either remain flat or more likely decrease by up to 5% from the highs of previous years. However, this will provide an opportunity for first home buyers and owner occupiers to get more traction, and for the market to bed down important consumer conduct improvements.
Chair of the Deloitte Australian Mortgage Report roundtable Deloitte financial services partner James Hickey said: “It is already appearing as if 2018 will be the second consecutive year since 2012 that settlement volumes (that is, the level of new mortgages issued in the market) either flattens off or reduces. (See chart) When placed into perspective, the strong lending growth of the 2013 to 2016 period was never going to be sustainable in the long term.
“The market recognises the need to take stock and find a new sustainable base for the long term. In addition, there is uncertainty around possible new rules and legislative change as a result of the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry.
“Conduct, compliance and distribution challenges will continue to take centre stage for lenders as the Royal Commission moves through 2018, and the coming of the ‘open data’ regime gives promise to what will become a more ‘customer in control’ future.”
Placing the customer more in control will be primarily facilitated by three things, technology, the opening up of data, and broker evolution, according to the 2018 Deloitte Mortgage Report roundtable of lenders.
They also agreed that refinancers will dominate the market and first home buyers will have access to greater opportunities than in recent years, with investor and interest-only loans continuing to pull back in response to the tightening of credit for these products. Also, the roundtable noted that owner occupier principal & interest (P&I) borrowers will continue to be highly sought after by lenders and such consumers can exert competitive pressure to seek the best deal for themselves in the market as well as take advantage of the low interest rate environment to build up equity against their mortgages.
Of course, 2018 will be a year in which consumers expect change as a result of the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry. However, there remains to be seen what can realistically be achieved in 2018 versus future years, as the changes around conduct and consumer interest may take longer to work their way into any regulatory changes. Notwithstanding, lenders are already responding and improving many of their processes, and indeed many of these were underway as a result of other recent investigations into the sector.
Deloitte financial services partner Heather Baister said: “Some of the commentary and issues coming out of the Royal Commission into Financial Services are areas where action is already occurring. For instance, the Combined Industry Forum (CIF) comprising banks, broker groups and consumer representatives, is already looking into ways of addressing the issues of transparency, distribution oversight, as well as accountability around mortgage lending. This is on the back of ASIC’s review into mortgage broker remuneration and the continued focus by APRA on serviceability assessments by lenders.
Baister added: “There’s every reason though that market providers should be cautious given the heightened uncertainty around the future regulatory landscape. Maybe ASIC will return with sharper teeth? While there are current laws already in place to manage conduct, I expect to see a greater obligation for lenders beyond the current ‘must not be unsuitable’ legislative hurdle.
“In the future, lenders will have to consider how they can demonstrate that the customer has a true understanding of their product. This will mean a more thorough assessment process, tailored to individual customers and their understanding of the loan. This will inevitably slow market growth.
Macro Growth Fundamentals
Deloitte Access Economics’ Director Michael Thomas said: “Regulators aiming to restrain increasing property debt amid concerns of an overheating market, have targeted investor lending. Tighter lending standards and restrictions on the volume of ‘interest-only’ loans to total new residential mortgages, have pushed up rates for investors. Market activity has begun cooling, with house price growth slowing in the latter half of 2017 and continuing into 2018.”
“Underlying demand remains solid with strong, albeit uneven, population growth expected to continue into 2020 (see chart). Jobs growth has also been strong, especially in Victoria.
“The outlook for construction activity in the near term varies across the state. For both NSW and Victoria, growth in housing construction has slowed from its peaks but remains at high levels and is underpinned by solid underlying demand.
“Taken together with the outlook for interest rates, slowing house price growth, moderating the prospect of further capital gains, restrictions on lending, such as on interest-only loans and loans to investors as well as to lending to foreign investors, we expect a period of moderation, rather than an abrupt adjustment.”
Baister said: “Although there is not much appetite for innovative products now, given the focus on regulation, if we fast forward to post Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry in 12 months, greater certainty should mean that lenders can sharpen their innovative products and services, and choose whether they remain a manufacturer or distributor, or a hybrid. It should also provide even more opportunity for the smaller niche and non-bank lenders.”
Hickey added: “A significant challenge for regional banks at present is that the operational costs of financial and prudential regulation is just as large on a regional lender as for a major bank. However, the opportunities are the chance for niche segmentation, and ensuring that such lenders are not always having to compete with the Majors head on for all their business.”
Hickey pointed to an example of one such niche being opened up in February 2018 when the Victorian Government launched its HomesVic program. This was a shared equity scheme to assist up to 400 first home buyers by reducing the amount of money they would need to save to purchase their first home. “It was met with overwhelming interest and in certain geographic locations, the allocations have been fully subscribed,” Hickey said.
The roundtable agreed the consumer may be better informed, and have a better understanding of key principles, but it is the choices available in the market, that make it complex and confusing.
Open Banking and Competition
The pending introduction of both open banking and Comprehensive Credit Reporting in July 2019 has the potential to significantly disrupt retail banking business models.
Paul Wiebusch, Financial Services Partner Deloitte said: “Sharing customer data reduces barriers to entry. As customers have the option to share their transaction data, existing entities such as mutual and regional banks, as well as specialist non-bank lenders will (theoretically) be better able to compete by using this information to enhance their product offerings, pricing and services.
“Increased competition could also come from new entrants to the market including fintechs, with specialised offers such as loan auction platforms (e.g. Joust) and small business financing (e.g. Bigstone Capital, Brighte and Waddle), and ‘tech-fins’ (e.g. Amazon, which has already teamed up with Bank of America in the US).
“Increased competition from fintechs was seen as the biggest impact from open banking for customers by the Deloitte 2018 Australian Mortgage Report roundtable. Also as global banks emerge from regulatory driven remediation and refocus on growth, we could see this reinvigorate their interest in the open banking opportunities of ‘digital only’ retail bank offerings.”
When it comes into play in July 2019, Wiebusch pointed out that open data will only bring greater competition through the willingness and ability of organisations to invest in the capabilities needed to harness the information. Such investments include access to funding or capital, capabilities in data mining, analytics and technological platforms, and ultimately an ability to strategically understand how to take this to market.
Wiebusch said: “It may well require material business model shifts for current incumbents. Simply having access to such open data will not of itself be enough for organisations.”
Hickey concluded: “We’ve seen the first Restricted Approved Deposit Taking Institution (RADI) licence was granted this year, with other groups also ready to launch in 2018. This makes the promise of a neo-bank, or ‘digital native’ bank, a step closer to reality.
“For many incumbents, while recognising the very important challenges coming from the series of investigations ongoing in the market, the major competitive threat in the medium term is the role of digital organisations creating a ‘new normal’ for the way in which customers deal with financial institutions.
“For many, this first step towards a neo-bank future is another building block of the customer in control future.”
For an in-depth look at the Report and detail from the roundtable see the Mortgage Report pages here.