Mortgage whitepaper may 2011

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Mortgage whitepaper may 2011

  1. 1. COMMERCIAL IN CONFIDENCE Lockstep Veda Whitepaper 1 Where to next for mortgage demand? Whitepaper – May 2011 Anna Russell, Product Manager, Veda Advantage
  2. 2. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? Abstract This paper looks at recent trends in property purchase, mortgage demand and lender selection in Australia, the consumer and market dynamics behind these trends, and the current market patterns likely to direct future demand. The findings provide insight into the fundamental changes in both mortgage supply and demand emerging in response to the GFC and the government’s subsequent stimulus packages. Significant demand shifts in various segments of the mortgage market are examined, with particular emphasis on the identification of future growth markets and the associated targeting opportunities for mortgage lenders. This paper concludes that, although the specifics of targeting and offer development may have shifted radically, the old adage of ‘the early bird catches the worm’ remains true, and lenders who can proactively identify and cultivate potential borrowers will reap benefits in the increasingly crowded and competitive mortgage market. Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  3. 3. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? Pre- GFC: ‘stable growth’ Pre ‘GFC’, the property market in Australia could best be described as ‘steady’. New home construction was increasing, and the renovation market was booming, with renovators and investors taking advantage of large under- capitalised tracts in Sydney and Melbourne’s inner ring suburbs. Demand growth was particularly strong amongst young urban professionals,1 a demographic highly active in the renovation market. Mortgage applications exhibited a steady increase, as did the average loan size: signals of a strong and stable market. The largest - and most rapidly growing – segment of the mortgage market in 2006/07 was made up of young families and recent arrivals to Australia, many of whom were new entrants to the property market.2 Borrowers were readily able to access low doc, no-deposit and intro- rate loans, with institutions outside the ‘Big 4’ gaining market share on the back of these more risky products. Post GFC: ‘flight to security’ In the immediate aftermath of the GFC, risk appetite downshifted amongst both consumers and institutions. With momentum temporarily stalled in the property market, the perennially popular No Deposit home loan was dropped from the product portfolio of many institutions. With lending criteria tightened, asset-poor first homebuyers and highly leveraged investors faced greater difficulty in securing finance. The volume and value of loan applications decreased, and an increased proportion of new borrowings were issued for refinance and loan consolidations as consumer appetite for debt 1 Growth sectors identified through profiling of mortgage enquiry data using Veda Advantage’s Landscape segmentation tool. 2 Geodemographic distribution of mortgage demand obtained from the application of mortgage enquiry data 2006-2008 Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  4. 4. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? sharply declined. In this climate of uncertainty, borrowers increasingly sought the security of established institutions; bank share of mortgages rose strongly across 2008 in a ‘flight to security’. In an effort to restimulate the lagging property sector, homebuyer stimulus measures were implemented at Commonwealth and State levels across 2009. As Figure 1 illustrates, this produced a short-term uplift in mortgage applications, accompanied by a corresponding uplift in new dwelling commencements. Figure 1: Mortgage demand, lender choice and key external events, Jul ‘06 – Mar ‘11 90% 400,000 Flight to security 85% 350,000 Bank share of residential mortgage enquiries 80% 300,000 75% 250,000 70% 200,000 65% 150,000 60% 100,000 55% 50,000 50% 0 Jan09 Oct06 Jan07 Oct07 Jan08 Oct08 Oct09 Jan10 Oct10 Jan11 Apr07 Apr08 Apr09 Apr10 Jul06 Jul07 Jul08 Jul09 Jul10 Enquiry volume Bank share (volume) However, by late 2009 it became apparent that much of the ‘new’ demand was simply demand brought forward, not growth. Figure 2 shows clearly how, when combined with the first interest rate hikes in 18 months, this created a significant hole in mortgage demand –and a not so merry Christmas ‘09. Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  5. 5. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? Mortgage demand across the 2010 calendar year show strong seasonality and a continuation of the post GFC contraction in demand. The Reserve Bank raised the official cash rate three times and, with mortgage interest rates returning to historical norms of 7.0 - 8.0%, these additional rate rises have been felt keenly by borrowers. The end of the first home stimulus package in June removed a strong driver for the first home buyer market; reduced activity in this previously buoyant segment contributed to contracting loan volume across the second half of 2010. However, the recent re-introduction of 95% LVR products by Westpac, St George, Commonwealth Bank and ING Direct may increase the opportunity for young homebuyers to enter the market.3 Figure 2: Mortgage demand, dwelling commitments & RBA cash rate, Mar’09- Mar‘11 3 http://www.spionline.com.au/2011/03/no-deposit-%E2%80%93-no-purchase/ Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  6. 6. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? Lenders outside the ‘Big Four’ have begun to regain the ground relinquished post-GFC, with market share creeping upward across 2010 for banks outside the ‘Big Four’ and for non-bank lenders. According to the Reserve Bank, smaller regional, building societies and credit unions have introduced more favourable loan to value ratios (LVR) and promoted extremely competitive interest rates as they battle to acquire a larger share of the home purchase 4 and refinance markets. Segments of Growth and Decline in the Mortgage Market As we move into 2011, four years since the first subprime collapse, the property market and employment markets have recovered some momentum; however a greater level of conservatism remains in both lender and borrower behaviours. The mortgage market is not homogeneous – there are distinct differences between homebuyers’ attitudes and borrowing capacity. These differences occur by age, gender, lifestage, ethnicity, income bracket and so on. An effective way to identify where pockets of growing and contracting demand lie in the mortgage market is to plot mortgage demand geographically and overlay a geo-demographic segmentation to elucidate the characteristics and behaviour of high and low demand groups. 4 http://www.money-au.com.au/finance-news/news/rba-warns-australian-banks- lowering-mortgage-lending-standards-7944/ Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  7. 7. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? Figure 3: Share of mortgage enquiries by lender type, 2009 – 2011 80.00% 350,000 70.00% 300,000 60.00% 250,000 50.00% 200,000 40.00% 150,000 30.00% 100,000 20.00% 10.00% 50,000 0.00% 0 Total Applications Big 4 Banks Non Banks Other Banks Linear (Total Applications) Analysts from VSG applied Veda Advantage’s Landscape geodemographic segmentation to mortgage enquiry data, and identified current patterns of 5 opportunity and decline within the mortgage market. Segments in decline In FY11 the largest volume of mortgage enquiries came from a segment of the market labelled ‘Urban Development’ - a group dominated by young families, and concentrated in outer suburbs and growth centres of Sydney and Melbourne. Land release on the fringe of both cities has enabled 5 Landscape is Veda Advantage’s proprietary geodemographic segmentation tool, and can be used to profile areas, streets or individual households. The segmentation defines a household at three levels of granularity -by group, segment and cluster. Groups are used here to provide a high level picture of market trends. Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  8. 8. MORTGAGE MARKET INSIGHT where to next for mortgage demand? construction of outer urban estates over the last five years, providing affordable opportunities for this group to enter the market. Supply constraints and increased development levies6 have caused price inflation on the urban fringe; whilst still a strong source of mortgage demand, purchase intent in this segment is shrinking due to affordability issues. Mortgage enquiries amongst affluent and settled segments of the population also declined, leaving the greatest mobility to purchasers in the mid and lower end of the market. Growth segments Two segments have shown a distinct uplift in demand across 2010: they are Cosmopolitan Lifestyle and High Density Living. Whilst they differ in life stage, income and attitude, these two groups share a key characteristic – a preference for high density living in close proximity to a primary or satellite centre. Cosmopolitan Lifestyle represents the affluent end of the apartment dwelling spectrum – the ‘young professional’ or ‘double income no kids (DINK)’ market. Demand in this market has been bolstered to some extent by the first homebuyer stimulus, however rising rental costs and a shortage of rental accommodation in high demand areas provide a stronger impetus to purchase. By contrast, households in the High Density Living demographic are high density by need, not by nature and have a strong latent demand for homeownership. Mainly recent immigrants and new graduates, they are concentrated in high density suburban centres such as Parramatta and Footscray. As they are not affluent their demand may be strongly affected by changes to credit policy and interest rates.6 Department of Planning 2010  Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  9. 9. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? Lender selection biases Homebuyers who seek mortgage finance from the ‘Big Four’ do have a different profile to those choosing a smaller lender, but this differential is considerably less than in the recent past. Historically, the older, more affluent borrower has gravitated to the size and security of the ‘Big 4’ whilst younger, self employed or highly leveraged purchasers have been attracted by the more generous lending criteria and competitive rates of smaller lenders. There are early indications that this mix may be shifting: whilst the ‘Big 4’ do still attract a greater proportion of the older, more affluent demographic, the difference between Big 4 and other banks’ customers is less distinct than in the pre GFC climate. Figure 4: Percentage change in mortgage demand, FY09 to FY10, by Landscape Group 25.0% % change mortgage demand volume % change avg enquiry amount 20.0% 15.0% 10.0% 3.7% 5.0% 1.1% 0.0% -5.0% -2.6% -0.9% -4.7% -3.2% -10.0% -6.1% -10.6% -9.2% -15.0% -12.8% -20.0% -15.7% -15.2% Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  10. 10. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? Short Term Outlook for Mortgage Demand The overall outlook for the next 3 to 6 months is for steady demand within an increasingly competitive landscape. The RBA has indicated that it is likely to leave rates on hold in the short term, with current indicator values for inflation and growth sitting in line with the country’s medium- term targets.7 The anticipation of rate stability and strong employment market8 are positive indicators for resurgent mortgage demand. The June cut-off date for first home buyer stimulus grants brought forward 2010 and possibly some 2011 demand in the first home buyer segment as well. In the absence of stimulus, first home buyer demand is likely to be considerably flatter across 2011 than it has been in the last two years. Recent federal banking reforms have banned exit fees from new mortgages effective from July 2011. Whilst it will take time for the full effect of these reforms to be felt, reduced barriers to exit will bolster consumer ability to switch brands, presenting an opportunity for lenders to capture additional market share with attractive refinance packages. As more no-exit- fee loans hit the market, price and service based competition between institutions will escalate as lenders strive to protect and grow their mortgage market share. Competition will be particularly fierce this time around due to the contraction in overall mortgage demand levels. Low dwelling commencement rates have continued across 2010 meaning that in the short term, demand will 7 http://www.rba.gov.au/monetary-policy/rba-board-minutes/2011/01032011.html 8 Department of Education, Employment and Workplace Relations 2011, Australian Labour Market Update January 2011, http://www.workplace.gov.au/NR/rdonlyres/4BAB9655-4C11-40C6-AC2D- CE7F14DDBE05/0/ ALMUJanuary20112Feb2011.pdf Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  11. 11. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? be depressed by a shortage of housing stock coming to market. If past precedent holds, uncertainty about global economic outlook and the flow on effects to Australia’s export-led economy will encourage homeowners to take a ‘wait and see’ approach to both selling and purchasing, resulting in low volumes in the resale market as well. In the aftermath of the Queensland floods, economists forecast some inflationary pressure from reconstruction expenditure, but this is unlikely to influence the RBA’s short term stance on interest rates.9 Until the clean-up is completed, demand for refinance and limit increases is likely to be stronger than demand for new property purchase in the Queensland market. A Longer Term Outlook Over the medium term, an increased proportion of older Australians are predicted to choose ‘ageing in place’ over downsizing to retirement living: better health at retirement enables seniors to remain in the family home much longer. If new construction starts remain low, mortgage demand is likely to remain suppressed in the first homebuyer market; conversely this may be offset by an increase in reverse mortgage demand amongst retirees. Housing affordability concerns will continue to mediate demand in the capital cities, with prices already exceeding some homebuyers’ maximum capacity to pay.10 Whilst some households will remain in the rental market, high property prices also have the potential to change the ‘shape’ of demand – that is, if prices remain high the prevalence of joint tenancies, 9 Matusik, M. 2011, ‘Mud and Guts’, http://www.opendevelopments.com.au/learn-from-us/news- updates/post/the-qld-floods-and-its-impact-on-the-property-market.html 10 Kendig, H. & Yates, J 2008, Is the Australian Housing System Sustainable? , AHURI Research and Policy Bulletin 099, 7 Mar 2008, http://www.ahuri.edu.au/publications/search.asp?Keywords=&Centre=&Search= Properties&PublicationType=rap&Search-Title=&ShowSearch=False&Year=&Search-Summary=&Direction= ASC&Search- Author=&Sort=Search-Title&CurrentPage=4 Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
  12. 12. MORTGAGE MARKET INSIGHTwhere to next for mortgage demand? intergenerational purchases and extended family households is likely to increase. Lenders who tailor their credit and marketing approach to meet these new markets may find themselves at a distinct advantage. Conclusion It is expected that, with fewer exit costs, the sales and marketing strategies undertaken by the lenders will need to become more innovative and flexible in approach in order to keep ahead of key competitors. With potential for the shape of the market to change, those lenders who can effectively identify and target distinct groups with a tailored product offering will gain an edge over those who maintain a generalised message. The use of data mining models and tools, such as VSG’s Mortgage Demand Model11, Landscape segmentation and Micro-Cluster Technology (MCT)12 solutions provides financial services marketers with a means to better understand their market and develop successful mortgage acquisition, retention and cross-sell strategies. 11 VSG’s Mortgage Demand Model utilises sophisticated multivariate analysis techniques to identify consumers who are likely to be in the market for a mortgage over the next three months. This model is applied most effectively in a customer acquisition environment. The model is mature, dynamic and is able to consistently identify those consumers that are in the market for a mortgage. 12 Micro-Cluster Technology (MCT) accurately predicts the likelihood of an existing customer applying for a mortgage in the next three months and is best applied for customer management / cross sell initiatives. The model is mature, dynamic and is able to consistently identify those existing customers that are in the market for a mortgage. Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia   www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.

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