of mortgage refinancing against stalling property values and tight funding conditions. According to the report, the key reason for lower profitability is lower demand. “If you look at it in total volume terms, then the demand is actually pretty much as low as it’s ever been,” North says. “Everyone is talking the market up but we’re just not seeing it come through in the numbers.” The report finds that despite lower official interest rates, loan approvals remained weak and some borrowers were finding it increasingly difficult to refinance their mortgages, resulting in longer loan durations and signs that some segments of the market are being ‘locked out’. “Although lower mortgage rates have provided an avenue for borrowers to repay debt, it has not contributed towards an offsetting uplift in mortgage approvals. Moreover, not only is the volume of approvals weak, but the average value of approvals is declining. The lack of recovery in owner-occupied approvals may be a reason for concern,” says JP Morgan Banking Analyst Scott Manning. Although the total value of mortgages continues to grow, to now stand at $1.25 trillion, the dollar value of growth each period is declining – with particular weakness in the owner-occupied segment. The report finds housing credit growth has continued to soften since breaking below double-digit growth rates in mid-2008. “In fact, the most recent three-month annualised growth rate of 3.6% for housing credit in August 2012 is the lowest level since the RBA started disclosing credit aggregates in 1976. Given the current outlook, we expect low rates of credit growth to continue – with risk to the downside – as opposed to watching out for a quick rebound off the back of lower interest rates,” the report states. According to North, the property market started entering a period of weakness in 2008, but government incentives resulted in a surge of first-time buyers, which was followed by an increase in the volume of new construction. “If you look at what happened, there was a very big spike post-GFC with all the government incentives,” North says. So essentially, the whole market went through that peak in 2009/10 and it’s been going downhill since then.”
WHY? Several factors are contributing to the current lows in the Australian mortgage industry.
“I’m also now seeing more of the mainstream brokers questioning whether they’ve got a sustainable business model going forwards” – MARTIN NORTH, DIGITAL FINANCE ANALYTICS “Affordability is not very good,” indicates North. “If you compared average house prices with average incomes, they are still very high. So people have to spend a lot of money to get a property.” And despite the RBA’s 150 bps reduction to the official cash rate over the last 12 months (as of October 2012), loan rates to consumers remain relatively high, North says. Stricter lending criteria and new regulations are also keeping approvals down. “I reckon there are about a million households in Australia who would like to be first homebuyers but can’t get into the marketplace, and the reason they can’t get into the marketplace is because the lending criteria blocks them – either they don’t have the savings or the income to be able to do it,” North says. And, lastly, North points to the difficulty borrowers are experiencing in trying to refinance. “Refinancing kept the market a little buoyant in 2010 and 2011, but people trying to refinance now are finding it much more difficult,” he says. According to the report, around 30% of first-time buyers are seeking re-financing, twice the rate of other borrowers, and 15% of those applications are being declined. This is substantially above other categories of borrowers.
BROKER PRESSURE Combined with lower loan volumes, changes to commission structures and increased operating costs means brokers are finding it tough. “My research with brokers indicates that it’s costing brokers a lot more than it used to in order to write the loan and that’s because they have to comply with the new supervisory guidelines, keep better records and satisfy themselves that the loan is not unsuitable. And therefore, despite more electronic submissions than
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