mortgage whitepaper may 2011

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.

http://www.vedaadvantage.com/


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




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




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/




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/




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.




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




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




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



http://www.workplace.gov.au/NR/rdonlyres/4BAB9655-4C11-40C6-AC2D-CE7F14DDBE05/0/%20ALMUJanuary20112Feb2011.pdf

http://www.workplace.gov.au/NR/rdonlyres/4BAB9655-4C11-40C6-AC2D-CE7F14DDBE05/0/%20ALMUJanuary20112Feb2011.pdf

http://www.rba.gov.au/monetary-policy/rba-board-minutes/2011/01032011.html


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



http://www.ahuri.edu.au/publications/search.asp?Keywords=&Centre=&Search=%20Properties&PublicationType=rap&Search-Title=&ShowSearch=False&Year=&Search-Summary=&Direction=%20ASC&Search-Author=&Sort=Search-Title&CurrentPage=4



http://www.opendevelopments.com.au/learn-from-us/news-updates/post/the-qld-floods-and-its-impact-on-the-property-market.html

http://www.opendevelopments.com.au/learn-from-us/news-updates/post/the-qld-floods-and-its-impact-on-the-property-market.html


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.



mortgage whitepaper may 2011

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