Are there shafts of light peering out from the economic doom and gloom that’s been weighing down consumer sentiment and contributing to Australia’s low credit growth environment? Figures from the first quarter of the year suggest that this may be the case, with signs pointing to mortgage market activity being on the up.
Take a look at the March figures from the recently launched RP Data Mortgage Index, for example, and there are signs of continued robust mortgage activity.
“The National Index reading of 91.1 remains historically high, with the National Index value 6.8% higher than February in raw terms and 6.2% higher in seasonally adjusted terms. This strong national result may be partly indicative of a seasonal lift in mortgage-related activity but also appears to be driven by increased activity from borrowers looking to take advantage of refinancing opportunities, with low interest rates and investors also being increasingly active in the market,” says RP Data head of corporate affairs Craig Mackenzie.
But don’t reach for the champagne bottles quite yet. Looking at the bigger picture, Mackenzie believes that March’s result isn’t necessarily a surefire harbinger of things to come.
“However, the strong result comes at a time when we are also seeing a sustained lift in many other housing market measures, including a recovery in dwelling values, higher auction clearance rates, and less discounting from vendors. It will be important to monitor activity across our finance platforms over the coming weeks to see if the level of activity is maintained,” he notes.
On a state-by-state basis, Mackenzie points out that WA saw strong levels of activity, but, “more surprisingly”, Victoria was also a strong performer. Meanwhile, Queensland saw a flat performance, while “relatively soft” mortgage activity events were recorded in NSW and SA.
No doubt the lenders’ rate movements will be a key determinant as to whether mortgage activity continues its robust performance or eases off as the year progresses. Brokers may well be interested to hear, therefore, that the authors of J.P. Morgan’s latest Australian Mortgage Industry report believe that out-of-cycle rate reductions – a trend that has been mooted to take hold, given recent RBA rate decisions – “are likely to be contingent upon improvements in deposit pricing”.
"The case for out-of-cycle rate cuts really seems dependent upon whether deposit pricing improves (which we are approaching with a degree of caution),” says the report. “There is a strong likelihood that the potential margin benefit from the improving average cost of wholesale funding may be strategically reinvested.”
That said, the report’s analysts believe that housing credit growth may have bottomed out and started to rebound, despite the absence of out-of-cycle rate movements from the banks. It notes that the historic low in housing credit growth seen last October (3.7%) was beaten – albeit modestly – in February (4.5%).
“Older down-traders are starting to look to move, which typically delivers net credit growth by selling to younger up-traders with higher loan to valuation ratios,” says the report. “We expect limited positive impact from first-time buyers, given affordability remains stretched.”
Other observations included:
First-time buyers are barely moving the needle, whereas down-traders have made significant inroads into their debt.
INTEREST BURDENS HAVE IMPROVED, BUT INDEBTEDNESS REMAINS HIGH
Particularly high for first-time buyers, and particularly low for down-traders.
STATE CONDITIONS VARY
Growing demand in WA from first-home buyers and investors, focusing on houses. In NSW there is a demand for units, especially from down-traders. Demand in Queensland and SA is “considerably more insipid”.
BANKING ON GROWTH
So which demographic will the banks be eyeing up going forward? The report notes that up-traders could be a target market, “given they have the highest average mortgage and the highest average income to service the debt”. However, it adds that down-traders may also be on the banks’ radars despite having the lowest average mortgage size. Crucially, this sector of the market has the highest average property value, the report’s authors observe: “They are more likely to be targeting equity release – thereby substantially increasing cross-sell potential into deposit and wealth products.”
Overall, however, J.P. Morgan’s boffins believe that the current economic backdrop doesn’t leave the majors with much wiggle space when it comes to their mortgage strategies, drawing the following conclusions:
ANZ: In the best position to sustain domestic mortgage growth, thanks to flexibility in its refinancing profile relative to its annual issuance target range.
Commonwealth Bank: Expected to hold current market share levels.
National Australia Bank: Likely to continue to grow modestly and accumulate further modest gains in market share.
Westpac: Will look to grow “at system” but not above, due to having the largest funding
THE PLAY FOR BROKERS
The good news for brokers is that their stake in the new home loan market is on the up, with the report noting that brokers are now writing around 45% of new home loans – a figure approaching pre-GFC levels.
However, the report is quick to point out that, while the broker-written proportion of this market may have increased, the overall volume of mortgages that have come through the third-party channel remains subdued.
Zoning in on the big four, the analysts at J.P. Morgan have some interesting comments regarding each of the big four’s strategies for engagement with mortgage brokers, and how this has affected each major’s market share.
Westpac, for example, “has continued to focus on proprietary distribution channels”, says the report, while CBA “has retained broker usage levels, further supported by its move to increase its stake in Aussie Home Loans”.
Meanwhile, ANZ has to compensate for its “underweight branch presence” by continuing with its strategy of high broker usage, say the J.P. Morgan team, but “it has been NAB whose growth rates are benefitting the most from re-engagement with the broker channel”.