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COMMERCIAL IN CONFIDENCE Lockstep Veda Whitepaper 1
Where to next for mortgage demand?
Whitepaper – May 2011
Anna Russell, Product Manager, Veda Advantage
MORTGAGE MARKET INSIGHT where 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.
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where 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
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where 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
Jul06
May27
Mar48Jan
69Nov8
9Se
p10Jul31
May52
Mar73Jan
94Nov1
4Se
p35Jul56
May77
Mar98Jan
19Nov3
9Se
p60Jul81
May02
Mar23Jan
4450%
55%
60%
65%
70%
75%
80%
85%
90%
0
1
1
Enquiry volume Bank share (volume)
Bank
sha
re o
f res
iden
tial m
ortg
age
enqu
iries Flight to security
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.
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
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where to next for mortgage demand?
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
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
3 http://www.spionline.com.au/2011/03/no-deposit-%E2%80%93-no-purchase/
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where to next for mortgage demand?
extremely competitive interest rates as they battle to acquire a larger share of the home
purchase and refinance markets. 4
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/
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where to next for mortgage demand?
Figure 3: Share of mortgage enquiries by lender type, 2009 – 2011
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Total Applications Linear (Total Applications) Big 4 Banks
Non Banks Other Banks
Analysts from VSG applied Veda Advantage’s Landscape geodemographic segmentation to
mortgage enquiry data, and identified current patterns of opportunity and decline within
the mortgage market. 5
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.
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
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
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where 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
Group 1 Su
ccess
Storie
s
Group 2 P
rofes
sionals
in Tr
ansiti
on
Group 3 Cosm
opolitan
Lifes
tyle
Group 4 U
rban
Develo
pment
Group 5 St
able
Suburb
s
Group 6 High
Densit
y Livi
ng
Group 7 Blue C
ollar C
ity
Group 8 Vintag
e Austr
alia
Group 9 F
arming H
eartl
and
Group 10 Reg
ional Cen
tres
Group 11 Sm
all To
wns & Bey
ond
Group 12 Li
ving i
n the C
ountry-20.0%-15.0%-10.0%
-5.0%0.0%5.0%
10.0%15.0%20.0%25.0%
-2.6%-6.1%
3.7%
-0.9%-4.7%
1.1%
-10.6%-12.8%
-15.7%
-3.2%
-9.2%
-15.2%
% change mortgage demand volume % change avg enquiry amount
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where 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
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where 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 OutlookOver 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
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.
MORTGAGE MARKET INSIGHT where 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.
ConclusionIt 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.
s Veda Advantage s Level 15, 100 Arthur Street s North Sydney s NSW s 2060 s Australia s s www.vedaadvantage.com s © 2011 Veda Advantage Pty Ltd. All Rights Reserved.