Growth Opportunities and Threats in the Mortgage industry for 2018
It’s common knowledge in many professional sports that championships are won in the off-season.
How well a team does when the season starts depends pretty much on how well-prepared and ready to win the team is, before the competition even begins
This is no different for any businesses who are looking forward to strong growth and significant business wins in 2018.
If you’re one of these businesses and want to step into 2018 knowing with certainty what to expect from the Mortgage Industry and how to be better prepared to make your mark and win your games, here’s a snapshot of what your playing field looks like…
Growth in the Mortgage Industry in Australia
3 trends in the industry:
- Annualised Growth of 3.5% over the five years through 2022-23, to reach $2.8 billion.
- Low home loan rates are boosting demand for industry services
- Despite the cooling off of the Sydney and Melbourne markets and subdued wages growth, the competition in the industry is intensifying with more players entering.
Industry Revenue – Past Performance and Outlook
The mortgage brokerage industry has experienced a relatively high revenue growth over the last five years, only slowing down to 2.8% in 2016-2017. This growth has been driven by rising house prices and declining residential house loan rates, which has boosted demand for loans by both owner occupiers and property investors.
Whilst the revenue growth will continue its upward trend, the projected slowdown in house prices growth, the rise in residential property loan rates and the tighter restrictions on lending to foreign buyers of domestic property, will restrict this growth to 3.5% annualised rate over the next five years through 2021-22.
EXTERNAL GROWTH DRIVERS
The key external drivers of growth are: residential housing loan rates, household disposable income and consumer confidence, number of households and residential house prices.
As residential housing loan rates have remained low in the last few years the increasing demand for loans has driven expansion in the industry. This trend is likely to change in 2018 but not in line with previous projections.
Whilst the RBA rate projections change every month – see figure below, the rate increase in the next 2 years won’t have as big effect on the industry as the falling household disposable income and property price adjustments.
The most recent OECD report suggests that the RBA is “projected to start raising the policy rate in the second half of 2018, and expectations of this move, together with macro-prudential measures, are helping cool the housing market”.
In September the market was pricing in almost two interest rate rises by the start of 2019, but by the end of October this had fallen to an expectation of one rate raise by the end of next year and a slight chance of another rate rise in the middle of 2019. And now there is only about a 50% chance of a rate rise by December next year.
A more telling picture of the short to medium trends in the housing market is presented by the growth of household disposable income, driven by wages and debt growth rates.
Currently the under-employment rate is at a record high of 8.7%. This number needs to fall significantly (by more than 10% to 7.6% and below) for the economy to register the forecasted 3% growth in private sector wages in 2018-19.
According to OECD “rising household indebtedness” is “keeping consumer sentiment relatively soft” – household debt-to-income ratio is at a record levels of 194% of household disposable income. That’s 26% points higher than it was five years ago.
According to the Economist, Australian house prices are over-valued by more than 40%.
To make this assessment the Economist looks at the relationship between prices and disposable income (affordability) and between prices and rent (a substitute for buying a home).
If rising prices move these ratios above their long-run averages, then either incomes or rents are likely to rise, or house prices to fall. “Across America house prices, after falling by 25% from their peak between 2007 and 2012, are now at fair value compared with rents and incomes.
But thanks largely to their big cities, housing appears to be more than 40% over-valued in Australia, Britain and Canada, according to the average of our two measures”.
• House-price index: rebased to 100 at a selected date – Q1 2000.
• Prices against average income: compares house prices against average disposable income per person, where 100 is equal to the long-run average of the relationship
• Prices against rents: compares house prices against housing rents, where 100 is equal to the long-run average of the relationship
Here’re some more research forecasts by local and overseas experts and agencies:
- Sydney and Melbourne housing markets are currently 40% over-valued, with house prices in these cities expected to rise further by around 10% to 16% in 2017, according to Louis Christopher of SQM Research.
- According to the International Monetary Fund (IMF), housing market risks in Australia remain heightened, especially in Sydney, mainly due to investor credit and interest only loans. House prices are estimated to be moderately overvalued by about 10%.
- Brisbane house prices are in a ‘holding pattern’, according to experts.
- There’s no urgency in the market because we still have low interest rates, low wage growth, modest growth in employment, still high under- employment rate so there is no real pressure to buy residential properties.
Current Industry Performance
Over the past five years, both the volume of mortgages originated through brokers and the proportion of loans sourced by brokers have risen, boosting industry revenue growth.
Mortgage brokers have broken new records, bringing in $49.46bn worth of residential home loans through the June 2017 quarter.
This figure, which comes from the Mortgage & Finance Association of Australia’s (MFAA’s) latest quarterly industry survey, shows a growth in loan settlements of $3.4bn between the March and June quarters this year.
The research also found that finance brokers settled 51.5% of all new residential home loans in Australia between April and June. This was an increase of 1.4% from the same time period in 2016.
The Mortgage Broker industry is characterised by a medium level of market share concentration, with the four largest players controlling just over 50% of the market.
This concentration will continue to increase with the big four banks playing a major role in it.
In early 2013 the Commonwealth Bank of Australia gained control of Aussie Home Loans and the National Bank of Australia has formed partnerships with brokers such as Advantedge and aggregators such as PLAN Australia, Choice and FAST.
Over the past five years more full-time as well as part time mortgage brokers have entered the industry, to make use of the growing demand for residential loan applications. This increasing competition has put pressure on existing players to invest in customer service, marketing and training of their staff.
This has eroded some of the industry profitability but has proved a valuable move as revealed by industry research. In October 2016, Deloitte released an MFAA-commissioned research report that documented the customer experiences of over 1,000 borrowers who took out a home loan over the past two years.
The report found that 34% of the respondents that took out a loan with a mortgage broker had an existing relationship with their broker and 32% were personally recommended to the broker by family or friends.
Industry competition will continue to intensify over the next five years putting pressure on profit margins.
Although the share of mortgages taken out through brokers is likely to continue growing, the projected rise in loan rates may deter some property investors from entering the market.
Over the five years through 2021-22, industry revenue is projected to grow at an annualised 3.5%, to reach $2.7 billion. This maybe a lower growth rate than in the past but is still higher than other professional service industries (the accounting industry’s growth is only 1.5% annually).
Over the next five years, the industry is expected to face increasing scrutiny from regulators over its remuneration model.
Technology and online aggregator websites will grow in popularity, but are not a significant threat to the mortgage brokerage industry. Still brokers need to continue investing in their customer’s service and offer personalised advice and convenience of service, to successfully compete with online services.
Since brokers have access to vast amounts of personal information about their clients, they are in a better position to advise them on the suitability of a particular mortgage, in relation to their risk tolerance and their overall financial situation.
How is this affecting your business? How are you planning to use the opportunities and mitigate the risks?
There are different business strategies you can adopt for long-term growth. – They will be discussed in part B, coming soon.
Here’s a preview:
Declining profit margins over the past five years have been forcing industry players to try new strategies, like entering into partnerships with third-party sources.
These can include real estate agents, accountants or financial planners, who receive commissions for referring their clients to specific mortgage brokers for advice on loan products.
Industry profitability can improve through referrals, as these increase a brokers customer base without a significant increase in marketing expenditure. However, ad-hoc, opportunistic referrals can be one-sided (benefit one partner only), can be random (not ongoing) and labour-intensive (rather than automated and happening in the background).
Employment is anticipated to grow over the period, reflecting the industry’s increasing reliance on skilled labour to achieve revenue growth.
Have a look at other tools and drivers you can use for growth in 2018:
Key Success Factors for Growth
IBISWorld identifies 250 Key Success Factors for a business. Some of the more important for this industry are:
- Supplier Relationships: It is important for brokers to have a strong relationship with multiple lending institutions to offer their clients an extensive choice of loans.
- Experienced work force: Experienced and knowledgeable staff are vital for superior customer service and to effectively communicate different loan products to clients.
- Economies of scale: Many of the larger operators have a scalable business model, allowing them to grow their originations and loan books without growing their cost base at the same rate. – You can scale your business through different business scale and development tools – let’s have a chat about your options
- Excellent client relations: Mortgage Brokers who provide excellent service and maintain good client relations, are more likely to get referrals from existing clients; good customer service helps grow your loan book via word-of-mouth.Investing in client service training or hiring people with the right client management skills is not the only option. A good balance of people and system-driven client service can result in an excellent service for your clients. This is how… Read more
- Strategic Partner network: This was discussed above; a well-managed partner referral and partner service process can add more value to your own client service but also increase your revenue and profitability.
Watch the video about our partner program…
The original research and analysis has been conducted and published by IBISWorld Australia – www.ibisworld.com.au
Other research sources include The Economist and OECD
Building and growing a professional services business can be harder than growing a “passion” service/product business. In other words, attracting clients who are eager to buy accounting, financial planning or mortgage services, is different to attracting customers eager to buy new cars, shoes or golf memberships.
To grow your business (be it sales, profits and/or assets) you rely on people and businesses to hand you not just their money, but also their trust (open their business or personal lives) so that you can help them.
To grow, you need to be able to sell more of what you offer, which is largely intangible to an average client, who also needs to trust you implicitly before they get to know you and your team.
Given the involved nature of the relationship between a professional service business and its client base it’s not unusual to have some barriers and challenges to growing.
For this reason, we’ve put together a guide to growth specifically for professional service businesses to provide answers and a choice of strategies for growth in 2018.