Sydney, April 08, 2009
First home buyers borrowing too much money at artificially low interest rates will be more sensitive to the inevitable future rises in unemployment and interest rates, according to a new mortgage industry report.
The joint J.P. Morgan/Fujitsu Consulting Australian Mortgage Industry Report (Volume 9, October 2008) also explores the market share shifts taking place in the Australian market.
The report stated there was no readily identifiable sustainable source of housing credit growth over the near team and while the banks will clearly continue growth at above-system levels, future market share gains will not be sufficient to sustain current levels of growth. We are seeing a significant change in the Home Lending market place.
“The four major banks have the lion’s share of new business now thanks to the flight to quality we have seen in the last six months,” said Martin North, Fujitsu Consulting’s Managing Consulting Director. “The announcement of potential help from the Big Four for people who may become unemployed will reinforce this trend.
“Indeed, they have been struggling to process all the new applications because of the increased volumes, from refinancing transactions, and first time buyers.
“The share of business written through the non-banks and smaller players has reduced significantly. The Deposit Guarantee has enabled players to raise capital through significant bond issues, and have been able to keep margins at respectable levels,” Mr North said.
The report also examined in detail the challenges for first time home buyers and policy makers.
J.P. Morgan banking analyst, Scott Manning, said: “Faced with sharply increased rents in recent times, potential first home buyers are attracted to the current levels of low interest rates and modestly declining house prices.
“However, mortgages are typically contracted over a 25 year term, and what may be an attractive interest rate today may end up being a significant burden in the not too distant future as interest rates inevitably rise.
“It is worth noting that despite Sydney house prices remaining relatively flat over the course of 2008, the first home buyers’ average loan size has increased from 14% from $248,000 to $283,000,” Mr Manning said.
Research conducted by Fujitsu Consulting reveals the changed attitudes of potential first home buyers. “There has been a 30% increase in the proportion of first home buyers who now believe they can afford to enter the market, and a 29% increase in the proportion of those who state the First Home Owner Grant has been of vital importance,” said Fujitsu Consulting’s Martin North.
The report cautioned first home buyers using the current low interest rate environment and government stimulus as a means to enter home ownership to consider:
- Interest rates will inevitably go up again;
- First home buyers typically have a higher initial LVR, therefore are highly sensitive to any future rise in interest rates;
- The outlook for income growth to absorb future increases in interest rates is poor; and
- Worse still, unemployment is expected to rise significantly.
“The banks themselves recently acknowledged these dynamics by introducing a range of measures to reduce initial LVRs and increase required saving rates,” said J.P. Morgan’s Scott Manning.
“Further, with limited refinancing or exit options available to stressed households as lenders withdraw from the housing market, we have recently seen more action being taken to avoid forced home sales via the escalation of awareness being drawn to repayment holidays of up to 12 months,” he said.
Separately, Fujitsu Consulting surveyed 26,000 banking customers for their views on refinancing in the current environment:
- Reasons to refinance are dominated by the need to reduce monthly repayments or pay down or consolidate other debt;
- Recent government stimulus has not done the job the government had hoped – recipients used it as a means to de-gear and provide a buffer against future uncertainty, as opposed to simulating demand through spending.
Other key findings of the detailed review of the mortgage industry include:
- Owner occupied re-financing has slowed and moderating levels of owner occupied refinancing is expected in the future due to slowing housing credit growth from tighter access to credit, and households incurring significant break fees to switch loans;
- Having previously capped out at 38% and declining to 35% subsequent to the onset of the global credit crunch, the proportion of all loans across the industry through brokers has recovered modestly; and
- The confluence of slowing system housing credit growth rates, the demise of wholesale originators, and the downward realignment of commissions have all conspired to drive down profitability in the mortgage broking industry. Fujitsu Consulting estimate a 50% reduction of broker income pools.
The Australian Mortgage Industry Report (Vol. 9, April 2009) is a joint effort between J.P. Morgan and Fujitsu Consulting, focusing on recent developments in the Australian mortgage industry, based on Fujitsu Mortgage Market and Yield Improvement Modeling.
Phone: +61 2 9220 3138 
E-mail: Elizabeth.x.mcdonnell@jpmorgan.com
