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.

 Veda Advantage  Level 15, 100 Arthur Street  North Sydney  NSW  2060  Australia 
 www.vedaadvantage.com  © 2011 Veda Advantage Pty Ltd. All Rights Reserved.


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

90% 400,000
Flight to security
85% 350,000
Bank share of residential mortgage enquiries

80% 300,000
75% 250,000
70% 200,000
65% 150,000
60% 100,000
55% 50,000
50% 0
Jan09
Oct06
Jan07

Oct07
Jan08

Oct08

Oct09
Jan10

Oct10
Jan11
Apr07

Apr08

Apr09

Apr10
Jul06

Jul07

Jul08

Jul09

Jul10

Enquiry volume Bank share (volume)

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

3
http://www.spionline.com.au/2011/03/no-deposit-%E2%80%93-no-purchase/



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 extremely competitive
interest rates as they battle to acquire a larger share of the home purchase
4
and refinance markets.

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

80.00% 350,000

70.00% 300,000

60.00%
250,000
50.00%
200,000
40.00%
150,000
30.00%
100,000
20.00%

10.00% 50,000

0.00% 0

Total Applications Big 4 Banks Non Banks
Other Banks Linear (Total Applications)

Analysts from VSG applied Veda Advantage’s Landscape geodemographic
segmentation to mortgage enquiry data, and identified current patterns of
5
opportunity and decline within the mortgage market.

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

25.0%
% change mortgage demand volume % change avg enquiry amount
20.0%
15.0%
10.0%
3.7%
5.0% 1.1%
0.0%
-5.0% -2.6% -0.9%
-4.7% -3.2%
-10.0% -6.1%
-10.6% -9.2%
-15.0%
-12.8%
-20.0% -15.7% -15.2%



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



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 Outlook
Over 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



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.

Conclusion
It 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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