Brokersite

Foreign investment laws that were reinstated last April are failing to dampen foreign interest in property, according to a NAB survey.

The quarterly residential property survey of 250 real estate agents, developers, owners and fund managers revealed they believed 9% of all house purchases over the next 12 months would be made by offshore buyers – or 47,000 of the 520,000 properties up for sale.

Restrictions on foreign investment were lifted during the credit crunch as part of the economic stimulus measures, but were reinstated in April to prevent overheating in the market.

The Real Estate Institute of Australia has investigated whether the Foreign Investment Review Board has been strictly adhering to the guidelines.

Meanwhile, the survey revealed respondents expected price growth to slow dramatically over the next year, with Melbourne worst affected, according to a new survey.

Respondents expected growth to slow to 1.4% in the next 12 months – down from the 5.4% expected in March. Melbourne prices are expected to grow by just 0.7%, with Sydney growth estimated at 2%.

“While residential house prices are still generally tipped to increase over the next 12 months, we have seen a significant cooling off since the last quarterly survey,” said NAB chief economist Alan Oster. “There has been a very big change in expectations.”

The reasons quoted for the slowing growth are mixed: while developers blamed access to credit affecting the construction of new homes, buyers looked to rising interest rates and sinking housing affordability instead.

Australia’s housing shortage is set to rocket to a shortfall of nearly half a million dwellings within ten years.

According to the Housing Industry Association, the national shortfall of dwellings – currently estimated at 190,000 – will widen to 466,000 by 2020 due to population growth. HIA chief economist Harley Dale also blamed planning constraints on for the projected increase.

“At the end of the day, the lack of adequate, affordable land supply is at the heart of the problem,” he told the Australian Associated Press. “The number of processes a development must go through is higher now than was the case 10 years ago. We are regressing rather than progressing in terms of the bureaucracy involved in building a new home.”

Dale estimated that it takes seven to eight years for a greenfield site to reach completion – an “unnecessarily long period that pushes up costs and reduces supply”.

Residential real estate listings continued to rise during July, according to SQM research.

Total national online property listings rose by 5.1% in July – the third successive month to show an increase in supply. SQM Research managing director Louis Christopher suggests that this shows an “increasingly softening market”, especially listing numbers in a normal market have historically remained flat or recorded a marginal drop during the winter months.

“Vendors have been more often than not failing to get the price they’re after. The old stock hanging on the market is competing with new stock coming on, resulting in an increase in overall supply,” said Christopher.

“The only capital city where supply has remained fairly consistent over the previous year is Sydney, indicating that this city is likely to represent the most stable market currently.”

Christopher believes that, With the additional expected increase in listing numbers for the spring selling season, national listings could reach a high of 370,000 advertised properties by December.

Self-managed super funds are increasingly investing in property, according to new figures.

SMSF administrator Multiport has revealed that, out of the $1.1 billion invested in funds it administers, 17% was allocated to property either directly or through trusts and funds as of 30 June. This brings SMSF property investment levels to their highest level since December 2008.

Multiport CEO John McIlroy attributed the increase to the better performance of listed property trusts, and added that it reflected “better returns and new investment into the sector”.

The figures also revealed that SMSF asset allocation is still dominated by investment in shares, with Australian shares taking up 40% of SMSF assets (down from 42.6% in March) and a further 7.6% in international shares. Cash and short-term deposit holdings was the next largest category, and accounted for 21.4% of SMSF assets administered by Multiport.

Small to medium broking businesses are at risk of having to stop writing loans if they fall for a common mistake when applying for credit representative status under new national licensing laws.

Under the new National Consumer Credit Code, if businesses decide to become credit representatives, both the business and any loan writers need to be appointed as credit representatives by ASIC.

“I think many misunderstand this,” said Jon Denovan, senior banking and finance partner at Gadens Lawyers in Sydney.

“I know of one medium size broker group who has already made this mistake. When getting appointed as credit reps by their aggregator, they only had their companies appointed as credit reps. This means they can’t write any loans until their loan writers are also appointed as credit reps,” he said.

Denovan explains that companies appointed as credit reps in effect can’t do any loan writing under new laws, as this has to be done by ‘human beings’ or ‘natural persons’ under the common law legislation. These ‘natural persons’, therefore, need to be individually accredited by ASIC.

The situation is different for a registered/licensed person’s directors and employees, who are automatically authorised under the NCCP legislation.

Mortgage brokers looking to diversify their revenue streams could do worse than looking at offering insurance products, according to a report by IBISWorld.

The research house predicts that insurance broking will experience a strong growth in revenue in the next 12 months – rising 7.2% to $11.2bn.

“There will be rapid growth in premium pricing as Australian insurance carriers strive to recoup underwriting capacity lost on recent investment activities,” GM Robert Brian said. “This will result in substantial revenue growth for brokerage firms since brokers earn commissions on the size of the premiums written.”

He said the same characteristics that set mortgage brokers apart from banks would also benefit the insurance broking industry.

“As brokers distinguish themselves from direct insurance sellers through a greater emphasis on advisory services and financial management, they will increase profitability and allow for both employment and wage growth,” Brian said.

Brian was writing in Smart Company and predicted that insurance broking would be the third “hottest” industry in the next 12 months. It came behind organic farming and online information services and just ahead of mobile telecommunications carriers and alternative health therapies.

Heritage Building Society will ramp distribution through the broking channel back up to 50% of all originations, following a sharp reduction in broker-sourced loans down to 40% during the financial crisis.

The mutual’s chief executive John Minz revealed to Broker News the group had reintroduced its standard variable rate and professional pack products to its preferred broker distributors in July, as part of a renewed push.

“We’re budgeting for an increase of what comes out of the [third party] channel,” Minz said.

During the financial crisis, Heritage culled the number of broker partners through which it distributed its loans, back to “those that gave us more significant support”. “Really we kept the majority by value and by number of our brokers, so this was a tinkering around the edges of our business model,” Minz said.

However, Minz has flagged the possibility it could again expand distribution through additional broking groups in future, a decision that would be based on continued economic and market improvements.

“There was a business decision behind the partners who were retained and those who were culled, and at some point if we have to revisit who those set of parties are we will, and those set of parties will look at that at the time based on what the potential benefits are,” he said.

The group is confident it has the support of the third party channel despite the cutbacks, having taken a “relationships-based approach” to handling the move and not “throwing the channel away”.

“We didn’t do it the way that some of the others did – like reading it in the newspaper – we gave people advanced notice, we took them through, we explained why we did it,” he said.

The move to slash broker-sourced loans was part of the Heritage’s pursuit of a “balanced, prudent banking model”, focusing on maintaining a diversified and cost-effective range of funding sources.

“What we wanted to do in 09/10 was concentrate on a range of measures, and they include how much we could lend and grow the balance sheet, how much we could get in the front door in funding and still allow us to outperform our prudential ratios,” Minz said. “We finished the financial year with a liquidity ratio of 19.2%, which is very high, and this give us a buffer to allow us to lend more than what we did in 09/10.”

The conservative strategy saw the group announce an eleventh consecutive year of record pre-tax profits yesterday for the year ended 30 June – a result of $42.3m, or a 17.9% increase over the previous year.

Overall loan approvals reflected the retreat from the broker market, down to $1.3bn from $1.4bn the previous year. However, the group said mortgage lending initiated through its 59 south-east Queensland branches grew to $782m in 2009/10, up 28 % from $611m.

Low-doc lending will remain a product available to a particular niche clientele, but is unlikely to ever revive back to the levels seen in 2007 and 2008, according to LMI provider Genworth Financial.

Acting chief executive of Genworth Financial, Paul Caputo, told Australian Broker the “main issue” with the continued growth of the product type has been the advent of new regulations, where “you really have to provide that a person has the capacity to repay the loan”.

“Having a person state their income makes it very hard under those regulations to get around that,” he said.

Genworth announced policy changes back in 2008 that required borrowers to provide their most recent 12 months worth of BAS statements, which has the capacity to show the revenue a business is generating.

“We feel that under those policy conditions, it does validate that a person does have the capacity to repay,” Caputo said.

However, Caputo said this is unlikely to mean there will be a low-doc revival to pre-financial crisis levels.

“We do think there still will be some low-doc lending within the market, particularly under the policy change we made back in 2008, but the volumes are going to be nowhere near what they were in the 07/08 period,” Caputo said.

“It’s still going to be a product that does suit a particular niche market, but its going to be at lower levels than it has been historically,” he added.

Mortgage House managing director Ken Sayer doesn’t discount a nation of renters, generation loans and the death of the great Aussie Dream as people get priced out of the property market.

Sayer foresees a “new order” determined by the cost and scarcity of funds and impending compliance charges.

“Interest rates will rise and the cost of funds to the borrower will increase as a result of the new order,” says Sayer.

“We may not see 13 percent again but we will get to 7 percent or 8 percent and this will automatically exclude a lot of consumers. The heat on property will retard, the explosive capital dance will disappear and it will become the norm to rent.

“Asian and old European nations have ‘generation loans’, which are never paid off and simply handed down to the next generation.”

He predicts that Mortgage House’s policy for dealing with brokers, which he admits have been perceived by most brokers to date as onerous, will be the “new order”.

“Our conditions have always been stringent,” he says. “We will never take a deal off a broker if we know they’ve been talking to other banks about it.

“We will not allow a broker to shop deals around. They arbitrage against lenders and try and wait for a mistake. We won’t deal with a broker unless we see the deal first.”

Asked if this isn’t compromising the independence of brokers he laughs and says, “there’s no such thing”.

“Lenders have always done sweetheart deals for volume producers. They may not hard code their behaviour but they do control it.”

Despite the changes he anticipates, Sayer says prospects for the industry are exciting, adding that non-bank lender Mortgage House plans to capitalise on every opportunity.

“In 2011 Mortgage House will rise to the top,” he told Lending Central.

His ambition is to at least double the number of branches by 2011.

“We’re sitting at 50 and we’ll have no less than 100 by the end of next year.

“Money will be fluid again by then,” he declares adding, “if you look through the phone you’ll see I have my fingers crossed”.

Sayer, who is currently preparing to go to market, forecasts that the cost of funds for non-banks will drop faster than for banks because the capital markets are re-opening and pricing is favourable.

“So for the next 12 to 24 months we will have a pricing advantage,” he says.

Another obstacle over the past two years, the savagely marked down credit rating of Australian mortgage insurers QBE and Genworth Financial, is also on the improve since Standard & Poors reaffirmed their credit rating in December.

“As soon as the capital markets re-emerge and the mortgage insurers’ credit ratings steps up another notch our cost of funds will drop,” says Sayer.

When this happens his approach will be very clinical. Mortgage House won’t go down the “better, faster, cheaper” road. The approach will be simply to go to market with its headline rate.

“If we went to the market and said we’re cheaper than banks we would lack credibility.

“We don’t have to bash anyone. All we have to do is document our loans and make all related costs transparent,” he says.

A few months ago Mortgage House invested heavily in its website; its plan being to re-emerge off the back of full disclosure.

In response to the aggressive tarnishing of non-bank lenders regarding deferred establishment fees Mortgage House has introduced a system where borrowers can buy a home, then sell up and buy another and receive a full refund of deferred establishment fees.

“We’re about integrity and full disclosure and if you’re with Mortgage House and you sell a house and come back and buy the next one you get all your deferred establishment fees back.”

Sayer has been in the mortgage finance business for over 30 years and is returning to what he describes as “good, old fashioned banking practices”.

“Our portfolio has little to no arrears and absolutely no losses. We attract good clients and we don’t throw them out of their houses if they miss payments. We sit down with them and show them how to budget.

“We don’t send out nasty letters saying, pay up or else,” he says. But when a Mortgage House consultant talks to a borrower who is in financial trouble you can bet that one of the first issues raised are credit cards.

Mortgage House will be moving into credit cards in a year or two and Sayer is adamant that if he takes on the zero interest for transfer balance ploy he will insist that the original credit card is closed and that consumers are thoroughly aware of the arrangement.

“What really annoys me are lenders who actually bank on the customer not knowing that new purchases are at the normal rate,” he says.

Sayer confesses making many mistakes along the way. Viewing people – staff and consumers – as mere numbers was the biggest.

“It’s one of my greatest regrets,” he says. “But I realised what an idiot I’d been and changed everything.”

He says he has also learned a lot about “systems, processes and accountability” and is looking forward to Mortgage House reaping the benefits of time saving and productivity enhancing methods, practices and techniques he has implemented.

“Things are happening again,” he proclaims.

Non-banks are beginning to reclaim market share lost during the economic downturn, as rises in interest rates cause borrowers to look for better deals through refinancing.

Australian Finance Group figures show refinancing accounted for 39% of new business in June, up from 33% for the previous six months, the highest result the group has seen since July 2008.

The Australian Financial Review reports that consumer confidence in non-bank lenders is returning, and that non-bank lenders are winning out because of the competetive pricing.

Speaking with Broker News, Mortgage House managing director Ken Sayer, Acuity Funding managing director Ranjit Thambyrajah said competition to Australia’s major banks is fast returning to the market, and is only set to increase as market conditions improve.

“Mortgage managers are in full flight right now,” Sayer said. “My understanding is that the banks’ market share has peaked, and non-banks and mortgage managers are taking some of it back as we speak.”

Thambyrajah agreed, saying of mortgage managers “the trend is there will be more coming in”.