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Mortgage Outlook in Australia 2011

Synopsis

The mortgage market is facing difficult times, with housing affordability reaching record lows. The current global economic uncertainty is exacerbating this situation. This report analyzes these trends and provides recommendation for providers.

Description

This report analyzes the outlook for the Australian property and mortgage markets. The report breaks down the market in terms of different customer segments, analyzes current trends, and forecasts future developments. Action points for mortgage providers are also included.Provides an in-depth discussion of the outlook for Australian mortgagesAnalyzes drivers of growth for different mortgage customer target segmentsDiscusses both long-term and short-term trends and advises how providers should anticipate these trendsUses a consumer survey of almost 2,000 Australians aged 18 and aboveAs a proportion of new lending commitments, first home buyer lending has fallen sharply since 2009. Between 2002 and 2009, first home buyers generally accounted for around 23% of monthly lending commitments. In March 2011, only 12% of lending commitments were for first time buyers.More theoretically, the value of an investment property should be equal to the sum of all future discounted net rental income, with the discount rate being proportionate to the expected risk of the investment. This is analogous to how the value of a share is defined as the sum of all future discounted dividends.There are some segments that will still be active in the forecasted upcoming subdued market. Refinancers will drive an increasing proportion of lending commitments. Downsizers and upgraders are also expected to account for a larger proportion of the market activity.What is the medium term outlook for the mortgage market, and why?Which segments will perfrom better than others?How should providers of mortgages target customers, and what should be the key points to consider when acquiring customers in these times?What proportion of mortgagors are experiencing financial stress, and how are the stressed mortgagors reacting?

TOC

OVERVIEW

  • Catalyst
  • Summary

EXECUTIVE SUMMARY

  • The mortgage market may be entering a period of stagnation
  • Australia's mortgage market exceeds A$1.1tn but is slowing down
  • Investment property market developments could create downward price pressure
  • Despite spiraling property prices housing costs have been relatively stable
  • Some important factors sustaining property price growth have changed
  • Property prices will remain flat or fall in the medium term
  • A small but growing minority of Australian mortgagors face financial stress
  • The majority of Australian mortgagors are in good shape, but stress is growing
  • Mortgagors have increasingly cut back on spending due to mortgage costs
  • Renters also face financial stress, pointing to a more widespread malaise
  • The changing Australian mortgage marketplace will alter loan provider business models
  • The online channel and the financial crisis have spurred competition and will lead to a focus on efficiency
  • Providers need to be prudent given the falling market, especially for some target segments

THE MORTGAGE MARKET MAY BE ENTERING A PERIOD OF STAGNATION

  • Australia's mortgage market exceeds A$1.1tn but is slowing down
  • The Australian capital city property market has outgrown wages
  • The steady growth in the mortgage market has recently been rocked by the financial crisis and government stimuli
  • Prices are relatively stable but the number of transactions is falling
  • Low affordability continues to pressure first home buyers
  • The average first mortgage has grown much faster than average wages
  • There are indications that the increase in the FHOG did little to benefit buyers long-term
  • Continued weak first buyer interest provides a lackluster forecast
  • Investment property market developments could create downward price pressure
  • A large part of the property market is based on the expectation of perpetual gains
  • When the expectation of perpetual capital gains falters, there is a strong incentive to sell
  • The large proportion of investment properties in Australia could lead to wilder swings in prices
  • The Australian mortgage market will gradually adapt
  • Despite spiraling property prices housing costs have been relatively stable
  • Renting will become more common in the long term and a lower proportion of Australian households will own their houses outright
  • Some important factors sustaining property price growth have changed
  • Property prices will remain flat or fall in the medium term

SOME AUSTRALIAN MORTGAGORS CONTEND WITH STRESS

  • Australia has been resilient in the face of global uncertainty
  • The general economic outlook has been stable over the last year
  • First time buyer and investor purchasing intentions are surprisingly strong
  • Mortgage broker usage has increased slightly
  • A small but growing minority of Australian mortgagors face financial stress
  • The majority of Australian mortgagors are in good shape, but stress levels are rising
  • Mortgagors have increasingly cut back on spending due to mortgage costs
  • Renters also face financial stress, pointing to a more widespread malaise

THE CHANGING AUSTRALIAN MORTGAGE MARKETPLACE WILL ALTER LOAN PROVIDER BUSINESS MODELS

  • A competitive market will ensure a focus on efficiency
  • The online channel and the financial crisis have spurred competition
  • The financial crisis has made the mortgage market more homogenized
  • Fees and charges will become less important drivers of profitability
  • Providers need to be prudent given the falling market, especially for some target segments
  • The falling market will make some target segments riskier
  • Refinancers, downsizers and upgraders will become more important target segments

APPENDIX

  • Data tables
  • Methodology
  • Further reading
  • Ask the analyst
  • Disclaimer

TABLES

  • Table: Financial stress indicators are common among the lowest income quintile
  • Table: Employee weekly wages (A$) and property price index, Q2 2002 to Q2 2011
  • Table: Lending commitments (A$bn), January 1995 to December 1998 (part 1)
  • Table: Lending commitments (A$bn), January 1999 to December 2002 (part 2)
  • Table: Lending commitments (A$bn), January 2003 to December 2006 (part 3)
  • Table: Lending commitments (A$bn), January 2007 to December 2010 (part 4)
  • Table: Lending commitments (A$bn), January to June 2011 (part 5)
  • Table: Outstanding housing loans (A$bn), March 2002 to December 2005 (part 1)
  • Table: Outstanding housing loans (A$bn), January 2006 to December 2009 (part 2)
  • Table: Outstanding housing loans (A$bn), January 2010 to June 2011 (part 3)
  • Table: Monthly owner-occupier dwellings financed, January 1995 to December 1998 (part 1)
  • Table: Monthly owner-occupier dwellings financed, January 1999 to December 2002 (part 2)
  • Table: Monthly owner-occupier dwellings financed, January 2003 to December 2006 (part 3)
  • Table: Monthly owner-occupier dwellings financed, January 2007 to December 2010 (part 4)
  • Table: Monthly owner-occupier dwellings financed, January to June 2011 (part 5)
  • Table: Average first home buyer mortgage (A$000) and average employee weekly wage (A$), May 1995 to May 2011
  • Table: Average annual wages per average first home mortgage, 1995-2011
  • Table: Average mortgage size (A$000), January 2002 to December 2005 (part 1)
  • Table: Average mortgage size (A$000), January 2006 to December 2009 (part 2)
  • Table: Average mortgage size (A$000), January 2010 to June 2011 (part 3)
  • Table: First home buyer proportion of monthly owner-occupier lending commitments, January 2002 to December 2007 (part 1)
  • Table: First home buyer proportion of monthly owner-occupier lending commitments, January 2008 to June 2011 (part 2)
  • Table: Housing costs as proportion of gross income, 1994-95 to 2007-08
  • Table: Housing costs as proportion of total expenditure (A$), 1984 to 2009-10
  • Table: Housing-type segments, 1994-95 to 2007-08
  • Table: Wages per first home mortgage and interest payments to disposable income, 1995-2011
  • Table: General economic outlook, 2009-11
  • Table: Personal economic outlook, 2009-11
  • Table: First home purchasing intentions, 2009-11
  • Table: Investment property purchasing intentions, 2009-11
  • Table: Mortgage broker usage and intentions, 2009-11
  • Table: Fixed proportion of monthly owner-occupier lending commitments, January 1995 to December 2000 (part 1)
  • Table: Fixed proportion of monthly owner-occupier lending commitments, January 2001 to December 2006 (part 2)
  • Table: Fixed proportion of monthly owner-occupier lending commitments, January 2007 to June 2011 (part 3)
  • Table: Mortgage stress attitudes
  • Table: Mortgage stress attitudes, 2009-11 (part 1)
  • Table: Mortgage stress attitudes, 2009-11 (part 2)
  • Table: Indicators of financial stress experienced in past 12 months
  • Table: Average rates offered on deposit products, January 2004 to December 2007 (part 1)
  • Table: Average rates offered on deposit products, January 2008 to August 2011 (part 2)
  • Table: Average three-year fixed mortgage and term deposit rates, January 1995 to December 1998 (part 1)
  • Table: Average three-year fixed mortgage and term deposit rates, January 1999 to December 2002 (part 2)
  • Table: Average three-year fixed mortgage and term deposit rates, January 2003 to December 2006 (part 3)
  • Table: Average three-year fixed mortgage and term deposit rates, January 2007 to December 2010 (part 4)
  • Table: Average three-year fixed mortgage and term deposit rates, January to June 2011 (part 5)
  • Table: Basic variable mortgage interest rate in September 2011
  • Table: Mortgage stress attitudes, by age
  • Table: Mortgage stress attitudes, by time expecting to keep main mortgage with current provider
  • Table: Expected mortgage tenure
  • Table: Expected mortgage tenure, 2009-11

FIGURES

  • Figure: Mortgage stress has increased since 2009
  • Figure: The capital city property price index has fallen since Q2 2010
  • Figure: Monthly lending commitments have recently been stagnant
  • Figure: Outstanding mortgages reached A$1.1tn in June 2011
  • Figure: The number of dwellings financed has recently fallen
  • Figure: The average first mortgage has grown much faster than average wages
  • Figure: First home mortgage sizes have grown faster than wages
  • Figure: First home buyer interest spiked in 2009
  • Figure: First time buyer activity has slumped recently
  • Figure: Investment property lending has been relatively flat since 2004
  • Figure: Housing costs have been relatively stable since 1995
  • Figure: Housing cost as a proportion of spending has risen since 1984
  • Figure: Renting has become more common
  • Figure: Affordability has worsened since 1995
  • Figure: Few consumers expect economic decline over the next 12 months
  • Figure: Personal economic outlook has been relatively stable
  • Figure: First home buyer intentions have edged back but remain strong
  • Figure: Investment property purchasing intentions are strong
  • Figure: Mortgage broker usage has increased slightly
  • Figure: Fixed lending commitments have been low for the last three years
  • Figure: A third of mortgagors experience mortgage stress
  • Figure: Mortgage stress has increased since 2009
  • Figure: Cutbacks due to mortgage stress have increased since 2009
  • Figure: Renters are the most likely to have experienced stress indicators in the past 12 months
  • Figure: Deposit product types have come to offer more similar rates
  • Figure: The difference between bank lending and deposit rates has decreased
  • Figure: Basic variable interest rates are quite similar as of September 16, 2011
  • Figure: Age is strongly negatively correlated with mortgage stress
  • Figure: Shorter tenure mortgagors are more likely to experience mortgage stress
  • Figure: Expected mortgage tenure varies greatly
  • Figure: Expected mortgage tenure has decreased
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