NEWS Broker-referred borrowers more likely to default According to new research by Digital Finance Analytics P2
OPINION Your trail book is an asset How to generate business growth – without losing your clients P14
COMMERCIAL Chinese investors covet commercial properties Sights set on Melbourne and Sydney P18
NOVEMBER 2016 ISSUE 13.22
INDUSTRY SPOTLIGHT Leading the charge
Bank of Queensland’s big plan for brokers P20
CONSUMER INSIGHTS Non-property owners the most vulnerable
AMP report says less than half of Aussies financially confident P24
PFS FINANCIAL SERVICES CAUGHT ON CAMERA
The 2016 AMA Brokerage of the Year’s recipe for success P10
The Australian Mortgage Awards Highlights from the industry’s night of nights
P28
BORROWER SNAPSHOT 2
NEWS
ASSOCIATIONS
REGULATION
LENDERS
FBAA welcomes HSBC (back) to the club P4
APRA eyes commercial lending
Liberty reports record results
P6
DGEN Y STILL WANTS TO BUY
BROKERNEWS.COM.AU EDITORIAL
Millennials’ intentions to purchase property
Editor Madelin Tomelty
Yes, I will buy
100%
Production Editor Roslyn Meredith
Global Asia-Pacific
Percentage of respondents
80%
9% 17% 12%
ART & PRODUCTION
70%
Design Manager Daniel Williams
60%
Designer Martin Cosme
50%
Traffic Coordinator Freya Demegilio
40%
10% 19% 16%
Not likely to buy
Buy outright
Don’t know
Marketing and Communications Manager Lisa Narroway
CORPORATE Chief Executive Officer Mike Shipley Chief Operating Officer George Walmsley Managing Director Justin Kennedy Publisher Simon Kerslake
EDITORIAL ENQUIRIES
China
India
Australia Hong Kong Japan
to look for the larger loan, can help position the application for approval, and households choosing to use brokers are often after a bigger loan on the same income, compared with those via a branch,” he said. Looking at loan to income (LTI), DFA found that those putting more than 60% of their income towards repaying their mortgage faced the highest risk. “As the LTI reduces, so does the risk. We think the LTI and DSR [demand to supply] ratios should become the cornerstone of mortgage underwriting. APRA please note!” he wrote.
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tel: +61 2 8O11 4992 fax: +61 2 9439 4599 subscriptions@keymedia.com.au
ADVERTISING ENQUIRIES
Source: CBRE Research
BROKER-REFERRED BORROWERS MORE LIKELY TO DEFAULT The latest analysis by Digital Finance Analytics (DFA) has shown that whether a borrower uses a first or third party channel influences the probability of mortgage default. Martin North, principal and founder of DFA, said clients who used a mortgage broker were “slightly more likely to default”, based on the DFA’s finding that 1.71% of bank clients defaulted on their loans compared to 1.93% of those opting for a broker. “We think there are a number of factors below the waterline here which explains the differences. For example brokers know where
Account Manager Rajan Khatak
Madelin Tomelty +61 2 8437 4792 Madelin.Tomelty@keymedia.com.au
10%
Buy with mortgage
Sales Manager Simon Kerslake
Human Resources Manager Julia Bookallil
20%
0%
SALES & MARKETING
Chief Information Officer Colin Chan
30%
55%
News Editor Miklos Bolza Journalist Maya Breen
90%
62%
P8
Loan-to-value ratios (LVRs) also affected the risk of default, although not through a straightforward relationship. Those in the 50–70% LVR bands were the least likely to default, while the risk increased for the lower bands due to constrained incomes. Higher bands were also at risk due to larger loans relative to income as well as lower net assets held. Other points of interest are that borrowers with interest-only loans are slightly more likely to default and those under 30 and over 60 years old are more at risk.
Simon Kerslake +61 2 8437 4786 simon.kerslake@keymedia.com.au Rajan Khatak +61 2 8437 4772 rajan.khatak@keymedia.com.au Key Media Pty Ltd Regional head office, Level 1O, 1–9 Chandos St, St Leonards, NSW 2065, Australia tel: +61 2 8437 4700 fax: +61 2 9439 4599 www.keymedia.com Offices in Sydney, Auckland, Denver, London, Toronto, Manila, Singapore This magazine is printed on paper produced from 1OO% sustainable forestry, grown and managed specifically for the paper pulp industry Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributions are invited, but copies of work should be kept, as Australian Broker magazine can accept no responsibility for loss. Australian Broker is the most-often read industry publication, according to independent research carried out by the Ehrenberg-Bass Institute for Marketing Science at the University of South Australia in December 2008. The research also found that brokers rate Australian Broker as the best for both news content and feature articles, followed by sister publication MPA. Overall, on all categories, Australian Broker ranks top followed by MPA. The results were based on a sample of 405 respondents who were the subject of telephone interviews.
ASSOCIATION HAPPENINGS 4
, DATES TO WATCH
FBAA WELCOMES HSBC (BACK) TO THE CLUB The FBAA has welcomed news that HSBC will return to the third party channel. The association’s CEO, Peter White, said that banks that ignore the third party channel are missing out on a big piece of the pie. With the broking sector now representing over half of all mortgages written in Australia, he said smart banks recognised the advantages of working closely with finance brokers. “We understand that all banks have their own marketing strategies, but when the broking channel is ignored the bank misses out on the option of a huge slice of the market,” White said. “Very few banks can afford this.” White said everyone wins when brokers have greater choice to offer borrowers. “Brokers ensure that products are not unsuitable for each individual customer’s needs, so not only does the bank have the opportunity to present its products, but customers win from greater choice.”
A rundown of the next fortnight’s events
NOVEMBER
8
What: MFAA webinar: What is best practice and how do I integrate it into my sales process? Where: At your computer Details: This webinar is for anyone looking to simplify and improve compliance procedures in their mortgage and finance broking business, and demonstrates how best-practice techniques can help improve results and performance for you and your business. Peter White
WHAT THEY SAID...
Nick Young “When separated from clients, a trail becomes an immediate equity stream that can provide tremendous opportunity” P14
NOVEMBER
Adrienne Smith “We want the end client’s experience to be a very good experience, and for the broker we want to make sure that his or her relationship with the client is respected and that they also have a great relationship with our local branches” P20
Philip Lowe “Prices seem to be increasing quite briskly again in some areas, although are falling in others. Growth in rents is very low, and there is a big increase in housing supply still to come” P24
15
What: MFAA webinar: How to use video successfully in your business Where: At your computer Details: Learn best practice for in-house video production as Geoff Anderson, video producer, author, and presenter, shares his experience on how video can help grow a broking practice of any size.
NOVEMBER
16
What: MFAA Port Macquarie PD Day Where: Macquarie Links Golf Club Details: This PD day will include updates on the property market and digital marketing as well as a panel session covering what’s hot and what’s not in the current lending space.
REGULATORY ROUNDUP 6
WORLD NEWS
ASIC CRACKS DOWN ON FRAUD
Since July 2010 when ASIC became national regulator of consumer credit, the regulator has investigated
Over
100 matters relating to fraud
GERMANY TIGHTER REGULATION FOR GERMAN RESI MORTGAGES German stock exchange gazette Börsen-Zeitung has reported that Germany’s Ministry of Finance has proposed a draft law aimed at tightening residential mortgage lending market regulations, according to Moody’s. Once enacted, the German Financial Services Authority BaFin would be authorised to tighten residential mortgage loan origination criteria to prevent house prices from overheating. This would be credit positive for mortgage Pfandbriefe (covered bonds) and residential mortgage-backed securities (RMBS) because it would reduce the risk of households taking on excessive debt during times of inflated house prices, Moody’s has said. The proposal comprises four components: a maximum loan-to-value (LTV) ratio, a minimum loan amortisation requirement, a maximum debt-service-to-income (DSTI) ratio and a maximum debt-to-income (DTI) ratio. “The finance ministry’s proposal follows the German Financial Stability Committee’s 2015 recommendation to the German government to implement a means for regulating residential mortgage loan origination,” Moody’s said. “The government’s proposal would only affect newly originated residential mortgage loans because of a grandfathering rule. Therefore, the credit strength of covered bond programmes and RMBS would improve over time, particularly by reducing borrower default, where a maximum LTV ratio will fall below currently LTV ratios.”
To date, ASIC has banned 74 individuals or companies from providing credit services
This includes
32
permanent bans
ASIC has brought criminal prosecutions against 14 credit service providers
12 of these have been convicted of fraud or dishonesty offences relating to the provision of false and misleading information to lenders in client loan applications
APRA EYES COMMERCIAL LENDING In its 15/16 Annual Report released on 17 October, APRA has stated that its efforts have managed to partially scale back residential lending trends in Australia, and that it will continue its focus on greater financial prudence for residential and commercial mortgage lending. “More recently, housing lending has shown signs of some moderation, in part due to measures APRA has taken to ensure prudent lending standards and restrain the more speculative elements of growth in this sector,” the report says. These changes commenced in December 2014 when the regulator wrote to all authorised deposit-taking institutions and identified areas of concern, including risk profiles, investor lending and serviceability assessments. “Although many of APRA’s initial objectives in this work have been met, sound mortgage lending standards will continue to be an area of focus in the coming year,” the report states.
In the second half of 2015, the regulator moved on to reviewing commercial lending practices, according to the report. This phase will be completed by the end of the year, after which the regulator will produce and publish more detailed commercial lending guidelines. APRA’s Annual Report follows an article published last month in the Australian Financial Review that said the regulator would still have a strong focus on the loan books of Australian banks moving forward, however in relation to commercial property lending. “In the history of banking, commercial property has always been front and centre whenever there have been any serious issues in the system. So it is natural that at times when valuations look to be on the high side, we are making sure the lending quality of the banks and the basis on which they are assessing credit is maintaining a healthy degree of prudence about it,” said APRA chairman Wayne Byres, according to the AFR.
LENDER UPDATE 8
NAB BOOSTS BROKER COUNT
In the year prior to September 2016, NAB recruited 379 brokers across its three aggregators (PLAN, Choice and FAST). This is a 10% increase and the total number of brokers is now 4,299. House lending by channel ($bn) 5% 6%
MORE THAN 50% OF HOMELOANS LOANS WRITTEN BY BROKERS Leading non-bank lender Homeloans Limited has released its 2016 Annual Report which boasts a 3% increase in total loan settlements, to $1.8bn. Both the chairman and the CEO have attributed this success, in part, to the firm’s relationship with its broker network, with more than 50% of all new loans acquired by the non-bank having been originated by mortgage brokers. Total branded settlement volumes delivered through third party channels also increased by 21% during the 2016 financial year. “Given the relevance and importance of this channel in the home mortgage market, we remain focused on supporting and growing the existing relationships we have with our broker partners as a key component of our distribution strategy,” said Homeloans CEO Scott McWilliam. The lender has also continued to grow its presence on the eastern seaboard, which has led to strong growth in the number of loan settlements. “By offering brokers and customers competitive products and quality of service, the company continued to consolidate its position as a viable alternative to the major banks during FY2016,” Homeloans chairman Robert Scott said, adding that the expansion was accompanied by the development of the company’s third party distribution channels. “Our focus is on providing a diverse and competitive suite of products which, when delivered in combination with our existing strong third-party broker relationships, continues to support the growth in settlements and maintain profitability.” Although Homeloans delivered a net profit of $5.3m for FY16, this was down from the $5.6m profit the previous financial year as a result of the costs incurred during the RESIMAC merger process, which led to a combined loan portfolio of over $13bn.
103.9
106.6
SEP 15
MAR 16
108.9
SEP 16
Retail, Direct and Small Business
2%
83.5
84.8
88.2
SEP 15
MAR 16
SEP 16
Broker
75.2
75.9
76.8
SEP 15
MAR 16
SEP 16
NAB Business, CSB and Private Wealth
Source: NAB
LIBERTY REPORTS RECORD RESULTS Specialist lender Liberty has reported a strong year of growth in which the company has achieved record profits. In the last 12 months the non-bank’s loan originations have more than doubled, its total assets have grown 46%, and before-tax profits have increased by 11%. Liberty’s national sales manager, John Mohnacheff, said the results were further evidence that Liberty had cemented its place as the lender of choice for more brokers and their customers. “It’s been a really busy year for Liberty. We’ve seen our loan portfolios grow across all asset classes including residential, commercial and motor. Additionally, deal-flow figures from our aggregator business partners show we are now consistently in the top 10 lending groups in the country, further evidencing Liberty’s strong market position.” Mohnacheff added that the lender can empower brokers to assist their customers and grow their businesses. “Not only can Liberty help brokers service a more diverse range of home loan borrowers with
our specialty lending products, but we can also help them diversify their revenue with motor, commercial and SMSF lending as well as insurance, including mortgage protection insurance,” he told Australian Broker. Liberty also once again ended the financial year as the only investment grade rated non-bank in Australia. “For us it has always been about continued and sustainable growth. We reinvest our profits back into the business because it puts us in great shape to continue growing and supporting our valued business partners and customers,” said Mohnacheff. In the coming financial year, he said Liberty was committed to helping its broker network learn more about the available products and grow their business. “We’ve put over 30 BDMs on the road to help us achieve this – more than any other lender. We recognise that a one-size-fits-all approach doesn’t work because every broker is different – with different customers and unique needs. Brokers need face-time to ask the tough questions, so we’ve provided the platform for them to do this.”
10
COVER STORY PFS FINANCIAL SERVICES
Daniel O’Brien, owner of this year’s AMA Brokerage of the Year, on what it took to make his one-broker band the industry’s best
WHEN DANIEL O’BRIEN traded in his former career as a bank manager with Commonwealth Bank to become a start-up mortgage broker in Sydney’s West, he saw it as a chance to do more of what he loved, with a lot less of the “BS”. Tired of internal bank politics and attracted to a better potential income and a passive income stream, O’Brien says he was also drawn to the broking industry’s core promise: to put square pegs into square holes, rather than round ones. “I liked the concept of sitting down with a customer and not minding where they go for a loan. I liked the idea of matching their wants and needs with the best options, rather than just selling a particular bank’s product,” he says.
11
PFS FINANCIAL SERVICES: A DECADE OF GROWTH
PFS Financial Services has grown year-on-year since its launch, through word-of-mouth referrals. In the 2015/16 financial year, O’Brien wrote 422 loans worth $154.8m, which included three all-time record months. 2005 2006 2007 2008 2009 Fiscal year
It’s a calling that has served him well since 2004. Starting out in a 2-metre by 3-metre bedroom near Penrith all by himself, he has grown the business steadily and is now in a position to maintain five staff and a quality office space in Bella Vista. Named AMA Young Gun of the Year in 2006, O’Brien was also able to rise quickly to become Broker of the Year in 2008, and at the 2016 AMAs held on 21 October, he took home the award he didn’t expect to win: the coveted Brokerage of the Year award. “It feels like we’ve come full circle to win such a big one. When I was interviewed afterwards, I don’t think I gave much to write about. I was babbling like an idiot.” Success hasn’t always been easy. O’Brien’s growth strategy basically came down to doing two jobs instead of one, rather than scaling up by hiring new staff. “I guess in that growth phase where you are potentially understaffed I went a different way to most, in that I didn’t get extra people in to get to a new level. I would work my butt off for a period of time then get that person in,” he says. He also differed in that he hired friends – like schoolmate Joshua Ransom in 2006 as operations manager – and clients, like Megan Byrne, who says it was O’Brien’s service while getting her own mortgage that helped convince her to join. “Knowing somebody more intimately, you have a better idea if they will work out within the business or not. You have a higher strike rate,” O’Brien says. The strategy has resulted in a strong business. O’Brien, who is the only broker, has grown loan settlements consistently year-on-year, hitting 422 loans worth $154.8m in FY2015/16, including a record $17.08m month in June this year. Customer service and word-of-mouth referrals are PFS Financial Services’ recipe for success. O’Brien says that because he and his team are down to earth, customers are easily able to open up about their financial situation, goals and dreams. “Joshua and I are simple guys from the Western Suburbs near Penrith, and the way we explain things to clients we think is basic and easy to understand,” he says. “We make complicated things easy to understand and communicate well with people, and we do that with a sense of humour as well.” This is supported by back-office systems and processes that prioritise simplicity, and by a committed and friendly team, both of which result in high productivity. “I don’t think we do amazingly well; we just do the simple things well. We tell the truth, work hard, keep clients well informed, and we have built our office around systems and processes so anybody can pick up a file and see what’s been done, what needs to be done next, and when it needs to happen. We duplicate that over and over again to create reliable service and just communicate well.” O’Brien is content with the single broker model. He says he would find it hard to justify the time and effort required to recruit, train up and manage new brokers who are likely to move
2010 2011 2012 2013 2014 2015 2016 $0
$50,000,000
$100,000,000
$150,000,000
Total loan settlements Source: PFS
“We are simple guys from the Western Suburbs near Penrith, and the way we explain things to clients we think is basic and easy to understand” Daniel O’Brien, PFS Financial Services on once self-sufficient, while having to share commission. “I think we’ll probably cap out at six staff, with maybe one extra admin person at some point. I don’t want to go to the level of having a dozen people,” he says. If anything, O’Brien says, his future might involve a move into full-time property development. “I’m quite active with developing property now, and at some point I could see myself exiting the broking industry to move
full-time into property development. But at the moment I’m still enjoying what I do,” he says. That’s because – for now – O’Brien and his team have more to achieve. “I’m quite competitive, and I’ve been lucky enough that every year I’ve done better than the last,” he says. “I do enjoy writing big numbers, and I see no reason why we won’t keep growing every year, because with each year that passes there are more clients, and that means more opportunity for word-of-mouth business.”
12
COVER STORY DANIEL O’BRIEN ON…
Marketing “I don’t do any marketing or use social media; it’s all word of mouth, and with existing clients, out of sight is out of mind. If you are not keeping in contact via newsletters and sharing things personally relevant to them in the marketplace, they will forget about you and next time they might use somebody else.”
Customer service “For us, even if there’s no news, we let clients know, because if the client knows you are doing something and you haven’t forgotten about them, it builds trust, and it will save time overall. If they are calling you, they are not 100% confident in you, but a quick 20-second call can show we are professionals and on top of it.”
Productivity “I do a high number of loans, and part of that is having very good processes and systems and staff to deal with that volume. But I also make use of dead time. If I’m sitting in a car driving somewhere, I’m making calls constantly to clients; if I have time to kill I’ll do something instead of just listening to music.”
Management “With the right simple systems and processes everyone knows what is required and there is less management time required. I don’t care how my team does it, as long as they do it. There are certain boxes that need to be ticked, like compliance for example, but I don’t need to spend time watching over their shoulders.”
Personal character “Some of the worst human characteristics are some of the best characteristics a broker can have. For example, as a broker, being impatient and anal are strong traits to have when you are dealing with banks that are taking forever to do things, but it’s not a great personal trait. Just ask the ex-wife.”
THE CUSTOMER AND THE TEAM PFS Financial Services operations manager Joshua Ransom and operations and client liaison officer Megan Byrne know that for them, the customer comes first. Operationally, that means keeping things very simple, Ransom says. “We don’t try and get fancy with our software or our processes. We have a basic checklist which we’ve kept virtually the same for the last 10 years.” This commitment to keeping it simple, as well as a strong customer focus and the ability to work well in a tight-knit team, is what Ransom thinks sets PFS apart. “You can have a lot of business coming in,
but if you can’t manage and control it and process it efficiently, that’s not any good,” Ransom says. “On the other hand, if you’ve got a high staff turnover that’s no good either. Just like a football team or sports team that’s stuck together over a couple of seasons, we know each other’s thinking to a certain degree and we all click really well together.” Byrne says constant follow-ups and efforts to stay in contact with clients – such as touching base after six months, or letting all relevant clients know when there are any loan changes – leaves clients impressed and appreciative of the service.
That requires a good team, she says. “I think it’s the team we have. Obviously, there’s Daniel, but the rest of the staff do get along well, and we know when to work and we know when it’s time to have a bit of fun. We work very hard, but we have a lot of fun as well, and a lot of laughter makes for a happy office.” Ransom says success is proven by referrals. “A huge percentage of our work comes from word of mouth and repeat customers, and our customers regularly refer friends and family to us. The fact that our referrals just keep growing every year really speaks to the strength of our customer service,” he says.
14
OPINION YOUR TRAIL BOOK IS AN ASSET
Trail Homes director Nick Young addresses how a trail book can actively be used to generate business growth – without losing your clients in the process
THERE’S NO doubt that a trail book is a precious commodity, and that the stability of its ongoing revenue stream is a bonus for brokers.
retirement plan. But there are a number of points worth exploring here, which may help clarify misconceptions and provide a platform
When separated from clients, a trail becomes an immediate equity stream that can provide tremendous opportunity However, its true value is generally not front of mind. The common industry view is that selling a trail book is exclusively associated with retiring or exiting from a business, and by contrast, holding on to your trail book means you can use the commissions as an indefinite
for brokers to reconsider trail books as a powerful asset for growth. Deciphering depreciation Let’s assume that your intention, like many brokers’, is to use your trail book’s commissions
as an integral part of your retirement plan. Why not? It makes sense on paper: you’ve been in business for, say, 15 years; you’ve built your book up and have been consistently earning $100,000 on commissions alone for the last five years – not a bad way to retire. However, what’s absolutely vital to understand if you have this expectation is that it’s a fact that, on average, trails depreciate by 20% per annum, and this is based on a broker’s regular work cycle – that is, the common cycle of losing clients as their loans mature or they refinance, while also acquiring new business at an equal rate. So what happens when you retire and your business is no longer being topped up? Your commissions will fall to $80,000 in 2017, $60,000 in 2018, $40,000 in 2019, $20,000 in 2020, and will end up at $0 by 2021. In summary, if you’re not continuing to top up your trail book, it will halve every three years.
15
Nick Young is the director of Trail Homes
But it’s not as depressing as it sounds (as long as you realise the alternative in advance!) The market rate for purchasing a trail book is one and a half to two times its annual value and is largely dependent on the maturity of the loan. Using the original example of a trail book valued at $100,000 per annum, this would equate to a payout of $150,000–$200,000 up front for a trail book of this size. What’s an even more interesting scenario is that you can tap into this $150,000–$200,000 at any stage of your business, not just at retirement. Now, this is where you can truly come to understand the value of your trail book. Options A, B and C Consider these scenarios: • $150,000 for business expansion A broker had successfully expanded his business and required larger premises with a new fit-out. He also wanted to hire some more staff, but he was finding it extremely difficult to raise capital through traditional lenders and getting frustrated by the associated roadblocks. In this situation, he could sell his $100,000 trail book for an immediate $150,000–$200,000 of ‘self-funded’ cash injection into his business, without necessarily losing his clients as part of the sale. In terms of the mechanics of client retention, most trail book purchasers expect clients to be part of the trail book transaction. There are also purchasers that clearly distinguish between a trail book and clients, and consequently don’t bundle the two components. The latter can be therefore be a game changer when scenarios like this one reveal their full potential. When separated from clients, a trail becomes an immediate equity stream that can provide tremendous opportunity. If you look at it this way, trail books, either in part or as a whole, can be sold independently at multiple stages of a business’s life cycle to enable growth, pay down debt or alleviate cash flow. In real terms, separating the trail book from the clients allows brokers to continue to write new loans, refinance old loans (and receive future upfront and trails from these new loans), leaving their client base intact and untouched. This ‘self-funded’ revenue stream is also an increasingly appealing alternative to trying to secure a business loan, which is often unattainable due to a trail being considered a high-risk asset. • $50,000 to pay down debt/alleviate cash flow Another increasingly common situation is to use a trail book as an asset to pay down debt and/or alleviate cash flow. Using the same idea as above, a broker could sell 25% of his $100,000 book ($25,000) to get up to $50,000 cash. This would mean he still gets $75,000 commission per annum, retains his clients and gets himself out of potentially hot water without going into debt. The alternative could be a short-term loan of 12–24% per annum, using a credit card or similar to pay bills (ie getting into increasing debt). • $100,000 to purchase a business An interesting spin on this cash injection option could be the purchase of a new trail book with clients to enable further business expansion. While less common, it is a natural avenue to consider for established brokers looking to extend their reach. The long and short of it is therefore this: a trail book is a massive asset. Make it perform.
TECHNOLOGY UPDATE
s
TECHNOLOGY A KEY PLAYER IN TEACHERS’ PHENOMENAL GROWTH
Mark Middleton
Teachers’ Mutual Bank (TMB) has just clocked up its biggest submission month on record. In September, Teachers’ registered a massive 25% increase in flow. National manager third party distribution Mark Middleton attributes a significant portion of the growth to the mutual’s recent merger with UniBank, and emphasised that the key factor in the winning scenario has been NextGen.Net’s state-of-the-art ApplyOnline technology. “Even with that 25% increase in submissions, the average turnaround is only 48 hours because behind the scenes our system and resources are set up to cope well with the added demand,” says Middleton. TMB and UniBank merged on 1 August 2015. This greatly enhanced their reach and augmented TMB’s initial base of teachers and their families by gaining access to the university education sector, thereby significantly increasing the market of potential borrowers. “To achieve this expansion successfully and serve everyone in the chain it was paramount to have the appropriate technology to support and supply. That’s where the NextGen.Net solution comes into play,” Middleton says. “The capability that we’ve invested in with NextGen.Net has certainly translated as quality and time. “One of the critical elements within our decision to enter the broker space was selecting the right IT vendor. We needed a cost-effective, efficient solution. NextGen.Net ticked all the boxes and continues to do so.” TMB’s launch into the broker market began with two aggregators and the e-lodgement component of the ApplyOnline solution in late 2013. “We’re now with 12 aggregators, which is a great outcome but has impact on the loan flow that multiple aggregators generate,” Middleton continues. “Fortunately we thought long-term and invested in our system and took on more of NextGen.Net’s offer, extending it from the initial electronic lodgement component to their Workflow module.
Tony Carn
This takes the application from initial lodgement to our credit assessors, who no longer have to manually enter a swag of information into our loan submission system in order to assess the deal.” Referring to TMB as “a very progressive mutual”, NextGen.Net sales director Tony Carn expands on this, saying: “Smart thinking means they’ve embraced the distribution market and invested in the right technology platform. In the process they established a scalable model that enables them to scale up efficiently and easily to deal with extra volume and at the same time not compromise great service and turnaround times for brokers.” TMB punches well above its weight. It won the Roy Morgan Customer Satisfaction award for Bank of the Year 2015 and was also listed among the World’s Most Ethical Companies for the second year running in 2015 by the prestigious New York-based Ethisphere Institute. Middleton says the awards are an acknowledgment of TMB’s ability to marry cutting-edge technology and individual service. “I say to brokers that their submission notes help our assessors understand the loan,” he says, adding that “we’ve retained a human touch at our back end”. “We don’t have a credit score module,” Middleton says. “Instead, our assessors look at the deal, take into account all the variables, and assess the deal on its individual merits based on broker’ notes, which we find works really well. The NextGen.Net system enables this to occur.” Just before press time, APRA approved the final sign off on Teachers’ merger with NSW-based Fire Brigades Employees’ Credit Union (to be renamed Firefighters Mutual Bank post-merger). The merger will take place on 1 November. Middleton says the plan is to move into the broker space with Firefighters Mutual Bank on 1 February 2017. Asked why firefighters are a good fit, he says: “Firefighters and teachers are essential services workers in our community, which is a key focus of our organisation.”
16
BEST PRACTICE DATA TO DRIVE BUSINESS Property market analyst John Lindeman tells the MFAA how brokers can use data from the ABS to increase their bottom line
IN AN interview with the MFAA, property market analyst John Lindeman has said there are two data sets from the ABS that are particularly relevant to brokers and their businesses. “There’s broad brush housing finance data – published as Housing Finance Australia 5609.0, which shows you the number and value of housing finance commitments made each month by type of lender and purpose in each state and territory. It’s the sort of information you might include in a newsletter if you have one,” Lindeman says. “There is another ABS resource that does far more for mortgage brokers, QuickStats. This service is Census-based and free, but most importantly it drills down to any individual suburb, urban area, region or city of
your choice, giving you critical information about the people and dwellings in that location.” QuickStats, he says, provides information about a local area in three categories – people, families and dwellings – giving snapshots of a selected area and comparing the results to the state and Australia as a whole. “This treasure trove of valuable data shows you what types of potential clients are most numerous in your market area, so that you can make the right type of offer to them.” For brokers, this data is particularly useful for finding aspiring first home buyers, thanks to QuickStats’ capability to show the number of renters in a suburb as well as the percentage of households. If this number is particularly high, brokers can assume that these same people are
aspiring to own their first home, according to Lindeman. “You can then ensure your advertising promotes the benefits of owning a home rather than renting.” Isolating the segments QuickStats can also be used to locate other borrower segments, such as possible renovators and upgraders, based on the ownership status of households. Homeowners that are paying off a mortgage and have a growing family are the prime group likely to renovate or upgrade, says Lindeman, “… and you can target your offers to promote the current low cost of borrowing and using equity to refinance for that badly needed renovation or extra room, or to find a bigger home in a better location”. Brokers actively seeking property investors, on the other hand, should look for areas that have a high proportion of homeowners, particularly with higher median ages and grown-up children but not retirees. They are more likely to be investors, and are the most active mortgagors in the market as their average hold time is around seven years. “This means that they will provide a constant source of refinancing and new loans, and because they don’t move somewhere else when they purchase, you can keep track of them more easily,” Lindeman says. Narrowing down business opportunities One of the most useful things about QuickStats, according to Lindeman, is the way it allows you to compare suburbs and postcodes to determine their potential for business. “For example, let’s say that you are planning to start a new brokerage in Victoria’s Mornington Peninsula and you have an opportunity to lease premises in either Blairgowrie or Mornington,” Lindeman explains. “A quick look at ‘dwellings’ in Blairgowrie shows you that of the 3345 dwellings in that suburb, a huge 73% are temporarily unoccupied, because they are holiday homes. This means if you conducted a door knock or letterbox drop campaign here, you would end up with sore knuckles or worn out shoes, but little else to show for your efforts!” Lindeman adds that within the ‘dwellings’ category brokers will also find a subcategory called ‘tenure’ to show how many renting households are in the area (and therefore possible first home buyers). Under ‘people’, brokers can see what the average age is within that suburb, which will obviously give a clear idea of the borrower segment. “Not only can QuickStats help you decide where to market and what products to offer, it can help you decide how to deliver them,” Lindeman says. “Let’s say you are in the Melbourne suburb of Dallas. A check of QuickStats under ‘people’ and then ‘language (other than English)’ tells you that while a quarter of the residents only speak English at home, nearly half speak only Turkish or Arabic. Presenting your promotional material in Arabic and Turkish would give you a huge edge in Dallas, and you might even consider [hiring staff who are] fluent in these languages.” Read the MFAA’s interview with John Lindeman at mfaa.com.au.
18
COMMERCIAL CHINESE INVESTORS COVET COMMERCIAL PROPERTIES Global property agency Knight Frank has released a report on the state of Chinese investment in international property markets. It shows that investors’ eyes are firmly set on commercial real estate in Melbourne and Sydney
KNIGHT FRANK’S recently published report entitled Chinese Outbound Real Estate Investment: Changing Currents, Rising Tides has shown that Chinese investment in major real estate markets around the world has continued to be strong in 2016, and there’s no indication it will let up for the rest of the year. The report on international Chinese investment in property markets is the third edition to be released by Knight Frank. Although stringent requirements have made it difficult for some Chinese investors to secure foreign exchange clearance, the report shows their interest in “gateway cities” is undiminished. These include cities in Australia, where the appetite for commercial properties in Sydney and Melbourne among Chinese nationals is still incredibly strong, despite the volume of Chinese investment in Australia having decreased since 2015. According to the report, the total value of capital flowing out of China was strong in the first half of 2016, with a total of US$10.7bn invested, and US$1.7bn of that was invested in Australia. Although this was a 37% decline year-on-year
in investment in Australia, it followed 2015’s record-breaking purchase of an office portfolio for US$1.8bn, putting the decline into context. “The volume of Chinese investment in Australia is down considerably year-on-year because of a lack of mega-deals in the first half, as large deals such as the Investa portfolio dragged the 2015 number higher,” said Matt Whitby, Knight Frank’s head of research and consulting, Australia. Year-on-year, the volume of office deals has dropped 65%, and hotel deals have dropped 42%, the report indicates. Despite this, it shows that Chinese and other Asian capital remains drawn mainly to Sydney and Melbourne’s office markets given their shortage of supply and their rental growth prospects, suggesting Chinese developers are now looking to diversify into incomeproducing properties. “Amid competition from other Asian buyers … there is a strong Chinese appetite for en-block commercial properties in both Sydney and Melbourne, attracted by rental growth supported by strong tenant demand and a supply shortage,” Whitby stated.
Dominic Ong, Knight Frank’s head of Asian markets, Australia, echoed Whitby’s remarks. “Chinese and other Asian capital continues to be drawn mainly to the office markets in Sydney and Melbourne,” he said. “Fewer buying opportunities, coupled with the positive rental outlook, have already attracted large Chinese private developers such as Poly Group and Shanghai Shenglong to the office market. Since June there have been a number of major deals in the making, which will underpin the investment market outlook for 2016. “Activity has picked up in the past few months. Some of the most recent transactions in Australia from Chinese buyers include 15 Help Street, Chatswood which sold for $43.8 million to One Pro Investment Group; 20 Bridge Street, Pymble which sold for $78 million to YuHu; 210 George Street, Sydney sold for $160 million to Poly Group; and 61 Lavender Street, Milsons Point sold to Aqualand for $110 million,” said Ong. Tenant demand in various sectors remains strong, but lack of supply has caused rents in both cities to rise and vacancies to fall. Yields, meanwhile, have been tightening but are still above long-term bond yields, according to Knight Frank. However, in its recent half-yearly Financial Stability Review, the RBA has said that while yields on Australian commercial property are higher than in many other markets around the world, attracting the attention of foreign investors, the lift in demand from investors has pushed prices higher, relative to rents. This means rental yields have fallen, most noticeably in the office and industrial property markets. “One concern is that the current low level of yields could prove unsustainable, particularly if global interest rates were to increase or demand from foreign buyers were to decline,” the RBA said. China’s stringent requirements that make it difficult for smaller investors to obtain foreign exchange clearance could be one possible cause for this decline, and a sizeable number of investors have invested through overseas subsidiaries as a result of tough regulation. There is a risk these subsidiaries may run out of funds if the grip on foreign exchange reserves is not loosened, Knight Frank said, which would affect the volume of Chinese investment in international markets like Australia. According to the RBA, if there was a mass exodus of foreign investors or global interest rates were to rise, this would weigh on property values, causing borrowers to breach their loan-to-valuation covenants – conditions requiring the amount owed to be kept below a given percentage of the property’s value. They would then be required by their banks to come up with extra cash to support their loans. “A decline in valuations would therefore be more likely to affect highly leveraged investors, who are usually closer to their covenant thresholds,” the RBA said. Perth and Brisbane’s weak commercial leasing markets – in which rents have been falling as a result of the mining downturn – are also cause for concern, as struggling rents will potentially hampering the ability of borrowers to service their debts. Despite these risks, commercial property lending, including to residential property developers, continues to grow strongly in Australia.
19
RBA CONCERNED OVER APARTMENT OVERSUPPLY RISKS The Australian commercial property market may be cause for concern, according to the Reserve Bank’s most recent Financial Stability Review. The apartment markets of inner-city Melbourne and Brisbane may be facing the threat of an oversupply glut, and the RBA has begun attempting some modelling on possible losses in the event that an oversupply should lead to large price falls, rising mortgage defaults and the collapse of some developers. With a default rate of between 5% and 15%, it would take at least a 45% price slump for inner-city apartments to trigger more than $1bn dollars in losses for the banking system arising from those areas, the report states. “In its extreme scenario, the RBA sees around $2 billion of additional losses coming from loans to developers, however losses under half a billion dollars are more likely based on the experience of commercial property markets during the global financial crisis.”
In a bid to improve property lending standards and mitigate risk, corporate watchdog APRA recently commenced a review of commercial property lending standards, including for residential developments. However, the RBA said builders would complete 16,000 new units in Melbourne, 12,000 in Brisbane, and 10,000 in Sydney over the next two years, and with so many new properties coming on to the market, there was a risk that off-the-plan buyers might not be able to settle because the banks could value the properties at less than the contract price – something that is already occurring in some cases. Banks may also deny some off-the-plan buyers enough finance to settle, especially foreign investors, since lenders have clamped down on lending to purchasers from overseas. The RBA said these risks, which would mainly hit banks through their lending to developers, were “closer to materialising”.
FAST FACT
US$1.7 bn The value of Chinese capital invested in Australian real estate in H1 2016 Source:Knight Frank
20
INDUSTRY SPOTLIGHT LEADING THE CHARGE
Following its EOFY16 results showing the fourth consecutive year of profit, Bank of Queensland’s head of third party distribution, Adrienne Smith, tells Australian Broker about the lender’s new program that will see branches offering greater support to brokers and their clients
BANK OF QUEENSLAND’S recently released Annual Report states the bank’s aim of “Being more accessible to the large number of customers who prefer to use brokers by expanding our broker program”, and acknowledges the fact that around half of all home loan customers use brokers. It’s no surprise, then, that a mere three years after entering the third party channel the bank has 4,000 accredited brokers writing 17% of its home loans. “That home loan growth has come from brokers – which is pretty significant when you think about just three years,” Adrienne Smith tells Australian Broker, and she knows better than most how vital brokers are to the growth and success of a lender’s home loan book. With a history of working in the broker channel in both the major and non-major bank segments, Smith is now nine months into her tenure at Bank of Queensland as head of third party distribution. Stated in black and white is the non-major bank’s strategy to grow its broker footprint, and Smith says one of the ways the bank is doing this is by establishing and nurturing the “critical relationship”, as she puts it, between brokers and the bank’s BDMS. Its Business Needs Review has been created purely to facilitate this. “We go through and just try and have a relationship with the broker where we can understand – as an example – how long they’ve been in business for, how many clients they have, what sort of sectors that they deal in, and then out of that we can then start to discuss with them the sort of offerings that we have,” says Smith. “As the relationship builds, you start to understand where you can provide real value to them and at the end of the day help them grow their business.” The vision and the strategy Bank of Queensland’s vision is to “create Australia’s most loved bank”, while its strategy for achieving this is to cater to niche segments that value a more intimate customer relationship. Smith says as much when asked what makes the bank unique. “It’s relationships,” she says. “Relationships would be the big one … We are a non-major bank in terms of we don’t try and compete with the big four. We like to build in-depth relationships and sustainable relationships … With the BDMs that I have on the ground, I’m continually talking to them
Adrienne Smith, head of third party distribution, Bank of Queensland
about the sorts of conversations that they’re having and just making sure that they are very much focused on the partnerships and relationships that they have with the brokers.” Continuing to work on this broker-BDM relationship is at the top of Smith’s priorities as head of third party, and she says the lender is currently experimenting with a new branch-broker partnership structure to further facilitate this. “We’re continually looking at how we can build on the partnership. One of the things we’ve got is a pilot going on where we’ve got some key brokers that we’ve teamed up with some branches, where customers are introduced to those branches.” According to Smith, what this means is that the broker has the relationship with the end
client, but then going forward, if the client feels like they need to have a relationship with the branch, there’s one available to them. “And the reason that we’re doing that is we just want to ensure that the client experiences that they have with BOQ are a great experience, whether it’s with a broker or another channel that they choose to go through,” she says. This idea comes off the back of feedback the bank has received from key brokers who have said it’s important to them that their clients are treated the same as banks’ retail customers. “They want to ensure their customers are treated as a name, not a number,” Smith says. “This pilot means their customer has a dedicated contact at their local branch; an additional layer of support if they require it.”
21
A new broker-branch relationship Bank of Queensland is not the first bank to roll out a structure that focuses on bridging the gap between broker-referred clients and bank branches, and, for that matter, between brokers and bank branches as well. Australian Broker recently reported on at least two other banks that have gone so far as to introduce relationship managers into branches, who deal solely with broker-originated clients’ needs. It seems to be a developing trend, and one that suggests banks’ acknowledgement of the prevalence and popularity of the intermediary channel among consumers. The fact is, many people (close to 55% of home loan customers) prefer to deal with brokers. With structures like the one Bank of Queensland is piloting, banks have begun working to dispel the fear of the ominous channel conflict that continues to cast a shadow over brokers. “We want the end client’s experience to be a very good experience, and for the broker, we want to make sure that his or her relationship with the client is respected and that they also have a great relationship with our local branches,” Smith says. Bank of Queensland seems to understand that today, catering to the direct-to-bank customer alone is not enough, and that brokers are a crucial link to new clients in what is a dramatically competitive and quickly evolving mortgage industry. Talking about this client-broker-bank relationship, Smith explains that the structure is not one-sided but rather offers many benefits to brokers. “The benefit for the broker is that if their customer is happy with the bank they introduced them to, it serves to only strengthen the broker-client relationship,” she says.
BOQ FYI
End of financial year 2016 Profit results ($) millions
A diversified customer base One part of the broker experience the Bank of
338
318
301 261
248
Cash earnings
↑$360m
up 1% since FY15
186
Statutory net profit
↑$338m 2013
2014
2015
up 6% since FY15
2016
Monthly housing loan settlements
Gross loans, by geographic segment
10WA% 4Other%
16Vic% FY16
Sep
Oct OMB
Nov
Dec Corporate
Jan
Feb
Mar
Apr
BOQ specialist
May
Jun
Jul
Aug
22 % NSW
48Qld%
Broker Source: Bank of Queensland
“With banks, you end up having a client that is sticky and a client that is also tight with their broker. They feel as though their relationship with their broker is actually stronger because they’ve been given access to a bank that cares for them all round” The end game is to increase post-settlement customer service for all broker-introduced clients. “What I’ve found in a previous life was this: with banks, you end up having a client that is sticky and a client that is also tight with their broker. They feel as though their relationship with their broker is actually stronger because they’ve been given access to a bank that cares for them all round.” This pilot structure is being introduced in NSW and Queensland, Smith says, but only time will tell if the program will roll out nationwide.
360
357
Queensland has been particularly committed to improving this year is turnaround times, and Smith says that since she has taken the reins, turnaround has improved dramatically. Settlements that used to take weeks now take days, she says. “If you have a look when I first came on, our service levels, our turnaround levels, were not where they needed to be. So one of the things that we looked at very quickly was how could we improve our back office … and we’ve seen some pretty good investments in technology for our lending platforms,” Smith says. The lending platform Smith refers to is responsible for covering 30% of the bank’s
mortgage applications, which, according to the BOQ Shareholder Review, “streamlines our process and improves the speed of our lending decisions and productivity, giving customers a more positive experience”. BOQ’s Annual Report also reveals that the bank’s broker network has continued to grow this year, and 84% of the growth in this channel has occurred outside of Queensland, which is good news for the non-major, which is currently focused on expanding its geographical footprint. The May launch of the Virgin Money mortgage product, under the Bank of Queensland group umbrella, is also aiding the bank’s growth across consumer segments. The Virgin Money brand is attracting a new customer demographic altogether: the more affluent, metro-located and digitally savvy customer. Bank of Queensland’s plans to expand Virgin Money’s aggregator partnerships over the next few months will also facilitate the bank’s customer growth, and 800 brokers are already accredited with Virgin Money. It’s clear that Bank of Queensland is going through a period of change and expansion. But from what Smith tells Australian Broker, these changes are set to put brokers and their clients front and centre, and this can only be a good thing for brokers’ businesses.
22
MARKET WRAP MARKET TALK
AFFORDABILITY CRISIS: NO END IN SIGHT The housing affordability debate has been front and centre lately, with the RBA, the federal government and economists all weighing in on the hot topic. But while the Treasurer continues to blame housing supply, others believe it’s the rock-bottom interest rate that is fanning the affordability fire
IN HIS first speech in the role, the Reserve Bank of Australia’s new governor, Philip Lowe, described the national housing market as “mixed”, and said the RBA had paid close attention to developments in household balance sheets and the housing market. “Over the course of 2016, there has been some lessening of the concerns that were building up last year. Aggregate credit growth slowed, as did the rate of housing price appreciation,” Lowe said at Citi’s 8th Annual Australian & New Zealand Investment Conference on 18 October. “Lending standards were also tightened.” As a result of these developments, the RBA board felt that lowering the cash rate to its current record-low level of 1.5% would improve prospects for sustainable growth and achieve the bank’s inflation target of 2–3%. “Prices seem to be increasing quite briskly again in some areas, although are falling in others. Growth in rents is very low, and there is a big increase in housing supply still to come,” Lowe said. Recent data from CoreLogic shows that home values rose 4% over the five months to 30 September – including the period in which the RBA held the cash rate steady. In the five months prior to 30 April, values rose by 3.4%. Furthermore, credit growth is still exceeding income growth, and much of this credit is going towards financing new housing construction instead of consumption. “It is a complex picture,” Lowe said. Addressing the housing affordability crisis in a speech to the Urban Development Institute of Australia on 24 October, Treasurer Scott Morrison acknowledged the difficulty Australians are facing in trying to get on to the property ladder. He said the proportion of people owning their own homes had dropped from 71% to 67% over the past 20 years, and that it was taking longer for people to become property owners and then pay off their mortgages. “This trend has the potential to undermine retirement incomes, with superannuation cashed in on retirement to clear the mortgage or having mortgage costs eating into retirement income or undermining their ability to save more as they approach retirement,” Morrison said.
NEW REPORT FORECASTS SOFTER MARKET
Houses prices, 3-year forecast $1,047,600
$1,034,100
$1,050,000 $774,300
$734,300
$770,000 $560,000
$525,700
$507,800
June 2015
June 2016
June 2019 (est)
Apartments, 3-year forecast $729,800
$705,800
$527,300
$515,400 $420,300
June 2015 Sydney
Melbourne
June 2016 Brisbane
The “real pinch point” is buying a first home, according to Lowe, as a 20% deposit on a median home loan was more than 100% of the average Australian’s annual household disposable income. “The market is getting away from people. No matter how hard they work or save or even earn, they are finding it harder and harder to get into the market.” To rectify this, Morrison said the government would put pressure on the states to ease planning regulations for residential land and improve the supply of housing. “Housing in Australia, especially in Sydney, Melbourne and Brisbane, is
$680,000 $424,700
$480,000 $390,000
June 2019 (est)
Source: QBE
expensive and increasingly unaffordable, but that does not mean it is overvalued,” he said. “Improving housing affordability right across the housing spectrum must therefore be a key policy goal for governments at all levels, including the Commonwealth.” To create an effective policy on housing affordability, he said it was essential to look at the individual factors. “Of all the determinants of house prices in Australia, whether cyclical or structural, the most important factor behind rising prices has been the long-running impediments to the supply side of the market.
23
“This not only relates to the volume of supply but also the responsiveness, flexibility, diversity and composition of that supply, as housing needs becomes more complex.” Morrison explained that one of the main causes of the current market undersupply was a period of weak construction that occurred in the mid- to late 2000s. This glut has yet to be reversed, even with the large volume of construction currently occurring in Sydney, Melbourne and Brisbane. “Whilst Sydney, Melbourne and Brisbane have record supply, most of this is in the inner-city apartment market,” Morrison said. “Unfortunately, we are still seeing a muted supply of detached housing in other parts of our cities. “More needs to be done to ensure that supply increases more broadly – both in terms of location and type of dwelling – and that the roadblocks to this increased supply are removed.” However, Chris Richardson, economist at Deloitte Access Economics, has rejected claims that present housing price gains are being driven by increased demand or weak supply, instead saying that the most critical driver is low borrowing costs. “As the cost of money has gone increasingly close to zero, the cost of housing has increasingly gone atmospheric,” he told the Australian Financial Review. “At some stage, interest rates will be a chunk higher than they are today. That does mean housing prices in Australia have to live through
a very long period of headwinds.” Richardson said forecasts of plummeting apartment prices and increases in official interest rates had created the perfect storm for real estate. “There’s an increasing risk that [property] becomes the worst investment in the next few decades. That might happen fast or slow. But every policy maker should pray that it happens slow.” Although the strategy of betting “double or nothing” on property has been working successfully so far, Richardson warned against assuming the current price gains and low interest rates would continue forever. “There comes a point where past performance starts to become a guarantee of an unwinding of future performance,” he told the AFR. He said: “People should not think that current conditions are normal in financial markets. And every time you price that into the house you buy or business plans you make, there’s more risk in that than is widely recognised.” These comments came a day before the release of Deloitte Access Economics’ latest Business Outlook, which warns that factors such as rising home prices in cities such as Sydney and Melbourne leave Australia open to risks later on down the track. “Interest rates have been too low for too long, and bubbles are bubbling. Yet today’s cheap money will linger,” Deloitte’s analysts wrote. “In cutting rates of late, the RBA has had to ignore solid growth, falling unemployment, eye watering household debt, and housing prices that are more pumped than an ’80s East German Olympic sprinter.”
‘SMASHED AVOCADO LIFESTYLE’ OR NOT, AUSSIE PROPERTY IS PRICEY
Median house price
Sydney $890,000 Melbourne $641,500
Brisbane $505,000 Perth $480,000
NATIONAL AUCTION CLEARANCE RATE HITS 2016 HIGH
Hobart $349,500
Canberra $625,000 Darwin $500,000 Adelaide $440,000
80.2%
The preliminary auction clearance rate for the week ending 23 October, the highest recorded rate for the year so far Source: CoreLogic
Source: CoreLogic
24
CONSUMER INSIGHTS LESS THAN HALF OF AUSSIES FINANCIALLY CONFIDENT AMP has released a report indicating that less than half of working Australians are confident in their finances, while Digital Finance Analytics’ Household Confidence Index shows non-property owners feel the most vulnerable AMP’S 2016 Financial Wellness in the Australian
STRESS TRIGGERS
Common triggers for people’s financial stress
Bad debt
The need to save for retirement
Providing for their family
Missing bill payments
Making mortgage repayments
50%
35%
34%
32%
22% Source: AMP
Workplace report has revealed that Australians’ financial confidence has decreased over the past two years, and one in four workers are finding it difficult to make ends meet. In 2014, 54% of respondents said they were confident in their finances, while that figure has dropped to 48% in 2016. These figures come despite an increase in the disposable income held by Australians, according to the report, which has risen 6.3% since 2014. “Financial stress is a common occurrence in the Australian workforce, with more than 2.8 million employees, representing one in four workers, under financial stress in 2016,” said Vicki Doyle, director of corporate superannuation at AMP. According to the Financial Wellness report, common triggers for people’s financial stress are bad debt (50% of stressed workers), the need to save for retirement (35%), and providing for their family (34%). Missing bill payments and making mortgage repayments also contribute to higher levels of financial stress for 32% and 22% of stressed employees, respectively. Digital Finance Analytics’ (DFA’s) latest edition of its Household Finance Confidence Index (FCI) suggests a similar national situation. Although the FCI rose from 95.8 in August to 97.2 in September, this is still below its neutral setting of 100. In addition, the September figure has been dragged down by those households excluded from the property market, according to DFA founder Martin North. DFA’s segmented findings show that owneroccupied households are the most positive about their financial position as a result of rising home prices in a record-low interest rate environment. Property investors are also increasingly confident, thanks to better-than-expected capital values, lower interest rates and no disruption to capital gains or the negative gearing policy. However, investors are also facing stagnant rental incomes and “poor tenant behaviour”, North writes. The FCI also indicates that one quarter of Australian households are “property inactive”, with the majority renting or living with friends or family. As a result, this group is excluded from the wealth effect of property – meaning the wealthier people feel, the more they are likely to spend; something DFA’s research indicates is currently enjoyed only by property owners.
“With incomes static, the costs of rent, alongside other costs of living, kept [property inactive people’s] scores much lower (and indeed take the national average below its neutral setting),” North writes. “Take property inactive households out of the equation, and the remaining groups would be well above the neutral setting. Your property owning status determines your wealth footprint – no wonder people aspire to get on the property ladder, at almost any cost!” The FCI survey has also shown that two thirds of borrowing households are as comfortable with the debts they hold as a year ago, reflecting overall bigger debts nationally, balanced by lower interest rates. Only 7% are more financially comfortable than they were a year ago, while 24% are less comfortable and finding it more difficult to service their debts in a low-income-growth, high-cost-growth environment. North says this level of debt stress is concerning, given the already record-low interest rate. “If rates were to rise, pressure on these households would rise, fast.”
25
A STATE OF STRESS
Darwin
18%
EVER MORE MORTGAGE ARREARS The percentage of Australian residential mortgages that are more than 30 days in arrears has risen to its highest level in three years, according to Moody’s Investor Service. These were the results as of 31 May this year and they are likely to climb further. “The increase in the 30+ delinquency rate across Australia raises the risk of mortgage defaults and is therefore credit negative for Australian residential mortgage-backed securities or RMBS,” said Alena Chen, vice-president and senior analyst at Moody’s. Underemployment and the slowing pace of home price growth will constrain mortgage performance for the remaining months of the year, the agency said. The report, entitled RMBS – Australia: Mortgage Delinquency Map: Arrears Will Continue to Rise from Three-Year High, is authored by Chen, and notes that mortgage performance decreased in all eight states and territories in the 12 months prior to 31 May 2016, from 1.34% in 2015 to 1.50% in 2016. Mortgage arrears in Western Australia, Tasmania and the Northern Territory reached their highest levels since Moody’s began taking records in 2005, and in South Australia the most recent delinquency rate was just 0.1% below the state’s record high. Unsurprisingly, given the decline in the mining industry, WA was the worst-performing state: the 30+ delinquency rate rose by 0.69% to 2.33% in the year prior to 31 May 2016. Poor housing market conditions also contributed to this result, Moody’s said. Nationwide, the postcodes with the highest number of mortgage arrears were those exposed to the resource and mining sectors. Sydney had the lowest delinquency rates due to stronger housing market conditions. Across all states, capital cities registered lower percentages of arrears than more regional areas; however, Moody’s warned that the increasing supply of new apartments in Sydney and Melbourne would put pressure on home prices and raise the risk of further mortgage delinquencies and losses. Overall, though, “while mortgage delinquencies will continue to rise, the deterioration in performance should be moderate”, the agency said.
Brisbane
30%
Percentage of workers experiencing financial stress Perth
23%
Sydney
Adelaide
20%
25% Melbourne
19%
Percentage of people experiencing financial stress nationally, by gender:
19% Males
Hobart
16%
30%
Females
Source: DFA
NO FOLLOW-THROUGH ON FINANCIAL GOALS
80%
of the workforce have financial goals in mind
but only
18%
of these people have a defined plan to achieve their goals
Source: AMP
26
TECH FOCUS FINTECHS KEY TO BETTER BANKING The CEO of peer-to-peer SME lender TruePillars says Australia should look to the UK for new regulation that supports fintechs, increases competition and leads to better banking conduct UP THE DIGITAL ANTE, INCREASE REVENUE BY UP TO 58%
Revenue growth over the past 12 months for SMEs with higher levels of digital engagement, relative to those with ‘basic’ digital engagement:
Advanced
+58%
High
+27%
Intermediate
+18% Source: Deloitte Access Economics
ACCORDING TO an article on Finder.com.au, the CEO of SME lender TruePillars, John Baini, says increasing competition would encourage banks to behave better and provide insurance against another GFC. The peer-to-peer lender is the latest player in the highly competitive SME market and has been been operating since June. It offers a marketplace lending platform that connects business borrowers and investors, with rates for the borrower determined by a five-star risk rating. Investors can earn returns currently averaging 12.5% per annum. It’s clear that there have been enough problems that the government has seen fit to hold the parliamentary inquiry,” Baini said. “But I always feel that the narrative is: let’s publicly shame them, let’s hold them to account, but in the end, if you do that, ultimately how can you really sanction the banks?” Baini told Finder.com.au he believed encouraging competition in finance would come from fintech companies, and that Australia should follow in the footsteps of the UK, adopting successful regulation and offering better support for fintech companies.
In the UK, the government’s establishment of a mandatory referral program means banks that are unable to service customers must pass them on to alternative finance providers that can. Baini says this initiative, as well as others, leads to better banking conduct. “In the UK, they’ve set up something called the British Business Bank, and they’ve actually actively put money through platforms like TruePillars, like SocietyOne, RateSetter (the equivalent platform in the UK), and they’ve actually seen the government come on as lenders to help get capital flowing,” he said. “The outcome is alternative finance in the UK is now seriously competing with the banks ... customers actually have a viable alternative to go to.” According to Baini, SME lenders such as TruePillars are on a different level to other alternative finance providers, who are essentially targeting the same borrowers as the banks. “Some other platforms such as RateSetter and SocietyOne, for example, are doing the newer personal loans and a lot of the borrowers that are successful would be ones that the banks would happily lend to,” he said.
By contrast, he said, TruePillars was targeting the borrower that the banks were less likely to approve. “We sort of feel we’re filling a gap that is just economically difficult for banks under new regulation, so I don’t see us as a pure disruptor like some of the other players, it’s more that we’ve found out an efficient way to deliver that loan and a funding source that has more appetite for that type of loan.” Baini added that, along with keeping banks in check, a more competition-friendly environment would offer some protection against a second GFC. “Banks weren’t able to get access to money from other institutions and both central banks and governments had to step in and provide them with funding,” he said. “If you can build an alternate finance industry that can fund itself in a different way, and from different sources to the banks, it can give you a bit of insurance against the next GFC.” TruePillars listed its fifth loan in September and the first for NSW, following four other listings in Victoria and South Australia.
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THE BETTER THE DIGITAL, THE BETTER THE REVENUE - DELOITTE Deloitte Access Economics has released a new study entitled Connected Small Businesses 2016 that reveals the importance of digital engagement to the success of SMEs. The report says: “SMEs that move up the digital engagement ladder have better growth prospects, both in terms of experiencing increased revenue growth as well as having higher expectations for future revenue growth.” The survey results suggest that, on average, the revenue per employee is more than 1.4 times higher for digitally advanced SMEs (around $223,000 per employee) as compared to those with a basic level of digital engagement (around $157,000 per employee). Deloitte Access Economics’ studies analysed data to also determine how much extra revenue growth a business was achieving for each extra level of digital engagement attained relative to the ‘basic’ engagement level. The results suggest that greater digital engagement pays off: SMEs at an advanced level of digital engagement were 1.5 times more likely to have experienced revenue growth over the previous 12 months
compared to ‘basic’ SMEs. “For the average ‘basic’ SME in our survey sample – which had a 24% chance of increasing revenue over the previous year – this means that all else being equal, moving up to the advanced level would result in a 37% chance of experiencing revenue growth,” the report states. Analysing just how much revenue would increase on “moving up a level of digital engagement” – for example, from ‘basic’ to ‘intermediate’ – the survey found an average increase of 19% per level, up to a total benefit of 58% growth for ‘advanced’ SMEs compared to ‘basic’ SMEs. The finding that increased digital engagement has a positive relationship to revenue growth is also consistent with results from other similar studies, according to the report. Deloitte Access Economics’ 2016 report SMBs in the Digital Race for the Customer found that a 1% increase in spending on online services (such as social media, online marketing and websites) by a given SME leads to a 2.9% increase in annual revenue growth for that business.
THE POWER OF DIGITAL
Australian SMEs that have reached ‘advanced’ levels of digital engagement, compared to SMEs that have ‘basic’ digital engagement:
are 1.5x more likely to be growing revenue
are 14x more likely to be innovating
are 8x more likely to be creating jobs
earn 1.4x more revenue per employee
are 7x more likely to be exporting
have a more diversified customer base Source: Deloitte Access Economics
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PEOPLE
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CAUGHT ON CAMERA The evening of 21 October saw over 600 mortgage industry figures flock to Sydney’s The Star for the 15th annual Australian Mortgage Awards. Awards were presented in 27 categories, covering brokers, BDMs and aggregators. Mark Davis of The Australian Lending & Investment Centre received the highly sought after Westpac Australian Broker of the Year award, while Westpac’s Shannon Gibbons was named Australian Broker’s Australian BDM of the Year. The NAB Australian Brokerage of the Year trophy was taken home by PFS Financial Services. Congratulations to all of the AMA winners! Photography by Simon Kerslake
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PEOPLE HOT SEAT
JEREMY FISHER The director and founder of 1st Street Home Loans discusses his view on the ASIC review and tells Australian Broker what superpower he wishes he had
Who or what inspired you to become a broker? Before becoming a mortgage broker, I was a A stockbroker in Sydney’s financial district in the city. I enjoyed the client interaction and being a part of the finance industry, but I felt that I wanted to run my own business, especially in a residential area. Back in 2002, I saw potential in the mortgage broking industry. Franchises such as Aussie and Wizard had established themselves and there was still plenty of room in the market for independent brokers. I had belief in the industry and a belief that it could offer me a fulfilling career.
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What will be the biggest disruption to the mortgage industry in 2017? ASIC’s broker commission and remuneration review will A continue into next year, and it will be interesting to see the outcome. Ultimately, brokers provide an excellent service for lenders as they work on a commission-only basis and don’t require the usual costs to the lender of having a full-time employee.
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If you were head of the MFAA or FBAA, what would be your first priority? I would try to have more interaction with the brokers A and aggregators to make sure that the value proposition of the organisation is recognised. The MFAA and FBAA were established to represent the industry and to be the voice of the brokers, but not all brokers are aware of the value of these organisations. These industry bodies have potential to further unite the industry and to further establish the profession of mortgage broking. I would like to be able to see this potential fulfilled.
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What do you think is your point of difference as a broker? Clients have said that they most appreciate my A responsiveness, communication and experience. I enjoy the feeling of ‘having a clean plate’, so I like to attend to new tasks as soon as possible. Fortunately for my clients, this gets their emails and phone calls answered quickly and their loans submitted promptly. The experience comes with time, and as each loan is different and the systems are always developing and evolving, I still feel I learn something new each day and can pass this knowledge on to clients.
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If you could have one superpower, what would be it and why? I like the idea of being able to be in many places at A once – to assist clients in the business, to grow the business, to help and support our charity partners, to spend time with family and friends, to play tennis, to travel. At the moment it’s a balancing act, but sometimes I imagine being able to focus on just one, and all.
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