Australian Broker 15.02 by Key Media

FEBRUARY 2018 ISSUE 15.02

Commission changes underway Major bank makes the first move on CIF reforms /04

Shadow shop begins ASIC aims to learn more about brokers’ practices and advice /12

MIKE FELTON The MFAA’s CEO reflects on bridging the industry divide during his first year in the job, and discusses the changes and challenges ahead /14

Brokers and the bubble Are brokers exacerbating the risks in the housing market? /16

ALSO IN THIS ISSUE … Inside an Olympian’s mind Reflecting on life and business from great heights /21 Adam Bradley Tackling a daunting investment deal with multiple layers /22 Lloyd Thomas On becoming an entrepreneur at 10 /30

NEWS

IN THIS SECTION

Lenders More lenders to change their commission models /04

Associations No sleepless nights for brokers, say associations /06

Market CBA changes caused friction with brokers /10

Regulators ASIC begins shadow shopping brokers /12

Aggregators AFG ramps up focus on white label /08

www.brokernews.com.au FEBRUARY 2O18 EDITORIAL Editor Otiena Ellwand News Editor Manuelita Contreras Production Editor Roslyn Meredith

DATES TO WATCH

Upcoming can’t-miss events

ART & PRODUCTION Designer Martin Cosme Production Manager Alicia Chin

15-27 FEBRUARY

20 FEBRUARY

20-21 FEBRUARY

MFAA PD Briefings

ACCC’s policy update

Representatives from the MFAA, ASIC and the CIF will be talking about key regulatory changes and how these may impact your business in 2018. Spots still available for February events in Adelaide, Perth, Darwin and Launceston

ACCC chairman Rod Sims will deliver his first public address for 2018 in Sydney on the watchdog’s activities last year and the challenges and priorities ahead

Responsible Lending and Borrowing Summit A timely summit in Sydney to discuss open banking, unethical practices, erosion of trust, and interest-only loans. This year’s conference will have a stronger focus on the role of the consumer and the ethical practices needed to create greater disruption and opportunities for lending institutions

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SALES & MARKETING Sales Manager Simon Kerslake Account Manager Rajan Khatak Marketing and Communications Manager Michelle Lam

CORPORATE Chief Executive Officer Mike Shipley Chief Operating Officer George Walmsley Managing Director Justin Kennedy Publisher Simon Kerslake Chief Information Officer Colin Chan Human Resources Manager Julia Bookallil

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21 FEBRUARY

26 FEBRUARY

New wave banking

Competition in the Australian financial system

At this FinTech Sydney event, Eric Wilson of Xinja and Nathan Tesler of WildCard Money will talk about how the new digital banks (neo-banks) are challenging the traditional players

Productivity Commission Chairman Peter Harris will give an address in Melbourne on the draft report of the commission’s inquiry into competition in the Australian financial system

6 MARCH FBAA Gold Coast Summit FBAA executive director Peter White will be talking about the CIF’s reforms and providing a regulatory update at this half-day event in Surfers Paradise

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16 MARCH

4-5 APRIL

Anti-Money Laundering Conference

Banking and Wealth Summit

Asset Finance Broker Forum

This Sydney forum is for banking and wealth leaders, regulators, policymakers and stakeholder groups to debate the future of financial services

FAST is hosting a number of Commercial and Asset Finance Summits across the country in April. This invitation-only event is designed to help commercial and asset finance brokers grow their businesses

This Sydney conference will take a closer look at who and how financial services organisations are doing business to better understand data and what it all means

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10-19 APRIL

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.

NEWS

LENDERS HSBC BAGS SECOND BROKER PARTNERSHIP Australia is continuing to expand its presence in the mortgage broking space, becoming the 24th lender on Mortgage Choice’s panel. The bank stopped offering mortgages to brokers in 2006 after selling its broker-originated loan business to Firstmac. However, a comeback was launched last year when HSBC partnered with Aussie Home Loans. Alice Del Vecchio, HSBC’s head of mortgages and third party distribution, said the bank would continue to look for other opportunities to expand its distribution network.

SYDNEY IS SECOND LEAST AFFORDABLE HOUSING MARKET Source: 14th Annual Demographia International Housing Affordability Survey, 2018

Middle-income housing affordability in Australia’s capitals, 1981–2017

HSBC

15 Sydney

Martin North Principal, Digital Finance Analytics

www.brokernews.com.au

Adelaide

Perth

Hobart

Canberra

Median multiple

0 1981

1996

2011

Note: Median multiple is the ratio of the median house price to the median gross annual household income, with 3-0 being considered affordable and anything above 5 being considered severely unaffordable

“The problem with volume incentives and soft benefits is that they raise complexity and confusion in the minds of potential consumers on whether they are getting the best advice”

Brisbane

HIGH MORTGAGE EXPOSURE SLOWS BANKS’ PROFIT leading ratings agency has warned of slow profit growth for Australian banks over the year ahead, saying their significant exposure to residential mortgages is to blame. According to Fitch, residential mortgages accounted for 40–60% of the major banks’ respective exposure at default (EAD) at the end of FY2017, with the proportion higher for most regional banks. “A significant deterioration in asset quality in the mortgage sector could undermine bank profitability and weaken capitalisation,” said the agency.

Melbourne

MORE LENDERS TO CHANGE THEIR COMMISSION MODELS ANZ has begun implementing CIF recommendations, with other banks expected to follow suit leading financial analyst says more lenders will be changing their commission models in the coming months after a big four bank confirmed a shake-up of its own remuneration structure. ANZ will pay brokers an upfront commission of 62.5 basis points, beginning 1 February – up from the most recent figure of 57.5 basis points. The bank’s trail commission structure will remain the same. The amendment means the volume-based incentive has been removed from ANZ’s commission structure – a measure that was recommended by the Combined Industry Forum in response to the ASIC and Sedgwick reviews. Martin North, principal at Digital Finance Analytics, believes A

more banks will follow suit. “It’s indicative of what’s going to happen – the pressure as a result of the ASIC inquiry to remove soft benefits and incentives, particularly volume-based incentives,” he said. North welcomed the amendment and said others in the industry should embrace it too as it removed ambiguity and streamlined the structure. “The problem with volume incentives and soft benefits is that they raise complexity and confusion in the minds of potential consumers on whether they are getting the best advice they could get and whether the advice is in some way being influenced by financial incentives,” he said. “Anything that can be done

to remove that ambiguity is a good thing.” The Sydney-based analyst also said ANZ’s amended commission system was unlikely to disincentivise brokers – in fact, it could lead to a slight increase in broker commission. “My understanding is that not very many brokers would have gotten the higher commission previously because it was volumeincentivised,” he said. Stuart Styles, Arthurmac & Co’s managing director, agreed that discarding the volume-based incentive was positive for both brokers and the general public. “It removes a question mark of allegiance to any particular lender,” he said. “It also opens a way to creating a level playing field in this space.” Styles added that broker remuneration was always under review as it was a fixed cost for banks. “They have the ability to change this overnight with little consultation from the broker community as it suits them.”

NEWS

A S S O C I AT I O N S CALL TO EXEMPT SME LENDING FROM CAP business lending should be dropped from APRA’s interest-only loan restrictions to give businesses access to the credit they need, says the FBAA. APRA currently caps the proportion of new loans that can be interest-only at 30%, but the FBAA claims this measure could end up hurting small businesses. “It’s tough enough for small business borrowers now in the lending arena without putting additional restrictions on them,” said FBAA executive director Peter White. SMALL

MORTGAGE LOAN DEMAND STILL UP for mortgage loans shows no signs of abating, with the number of loans approved in November 2017 posting a seasonally adjusted rise of 2.1% from October. Data from the ABS suggests that cooling house prices may have encouraged more newcomers into the market, as a record 18% of all owner-occupier loans were directed to first home buyers. The average loan size for first home buyers rose $3,300 to $327,100, while the average loan size for owner-occupier housing went up by $11,000 to $388,900. DEMAND

NO SLEEPLESS NIGHTS FOR BROKERS, SAY ASSOCIATIONS Leading industry figures have spoken out to soothe broker concerns royal commission into the banking, superannuation and financial services industry will hold an initial public hearing in February, but brokers have nothing to worry about, according to senior figures in the field. “I think it’s worth noting that we’ve had two significant reviews in the past 18 months – the ASIC broker remuneration review and the Sedgwick report – and neither of these found systemic poor outcomes or systemic harm to consumers,” said Mike Felton, CEO of the MFAA. While some industry players had expressed doubt that the commission would cover mortgage brokers in its investigation, the eventual inclusion was not a complete shock. THE

“Given that 55.7% of all mortgage lending is originated through brokers, we always expected that aspects of mortgage broking would be looked at by the royal commission,” said Felton. Brokers’ inclusion was confirmed when Treasurer Scott Morrison and Attorney-General George Brandis released a joint statement in December identifying “intermediaries, such as mortgage brokers” as among the entities the commission would look into. Felton said the mortgage broking industry would fully engage with the process and respond to the commission as required. The Commercial & Asset Finance Brokers Association (CAFBA) also told members there was no cause

for concern and no reason their businesses should come under the spotlight. “While we will be watching the royal commission’s investigation with great interest, there is nothing at the moment that has made us believe that there will be a strong focus on our activity,” said Kathryn Bordonaro, vice-president of CAFBA. Instead, Bordonaro said it would be appropriate for the royal commission to look into the pointof-sale exemption that was enjoyed by the motor vehicle industry. This exemption allows car dealerships to help consumers get financing from licensed credit providers, but the sum borrowed can only be used to pay for goods and services provided by the dealership. “That was a temporary exemption that was put in place when the National Consumer Credit Protection Act was first introduced,” said Bordonaro. “That temporary exemption is still in place eight, nine years later.”

“Given that 55.7% of all mortgage lending is originated through brokers, we always expected that aspects of mortgage broking would be looked at by the royal commission” Mike Felton CEO, MFAA

VV$40,614,829,064 ANNUAL DWELLING VALUE GROWTH BEGINS TO MELLOW Source: CoreLogic

Combined capitals

20%

Combined regional

10%

-10% Jan 1998

www.brokernews.com.au

Jan 2003

Jan 2008

Jan 2013

Jan 2018

NEWS

A G G R E G AT O R S

AGGREGATOR NEARS MERGER DEAL WITH BANK has taken one step closer to sealing its merger deal with Goldfields Money after the two signed binding documentation ahead of a shareholder vote. Goldfields signed a share sale and purchase agreement to merge with Finsure by buying 100% of the diluted shares in Finsure through the issue of Goldfields shares, an ASX update shows. The transaction values Finsure’s equity at $61.1m and the merged entity at $97.5m, based on the agreed capital structure. FINSURE

AGGREGATOR RAMPS UP FOCUS ON OWN LABEL The aggregator has identified growing its white label products as a way of capturing more broker market share

Finance Group is reported to be building up its focus on its own label of mortgage loans to bolster profit margins amid expectations of a slowdown in credit growth. The Australian Financial Review reported on 23 January that AFG had informed its business development managers of the plan, with a view to increasing their focus on white label mortgage products. The article said it was unclear whether AFG has set incentives or targets to boost mortgage lending through the broker channel. A spokesperson said the company’s brokers were paid “a standard rate of commission” for selling AFG products. In his speech at the AGM last AUSTRALIAN

November, CEO David Bailey identified growing the penetration of AFG-branded products as part of the company’s strategy to increase its share of the mortgage broking market. An AFG spokesperson said the company had dedicated business development managers for its white label loans, and AFG-affiliated brokers had to meet responsible lending guidelines when recommending mortgage products, reported the AFR. The aggregator’s financial results, announced on 25 August 2017, included an increase in residential settlements from $33.8bn to $34.3bn between FY16 and FY17. Its total loan book grew by 11% to $133.3bn, which included $126.5bn

in residential and $6.8bn in commercial mortgages. Settlements at AFG Home Loans increased by 38% from $1.9bn to $2.7bn, growing the division’s loan book by 44% from $3.8bn to $5.5bn. Lodgments were also up 50% on July FY17, with AFG Home Loans now used by more than 10,000 retail customers. Across all its products, AFG currently has a panel of over 45 lenders with more than 3,400 individual products (up from 1,450 in April 2015). Broker numbers continue to increase, moving from 2,650 on 30 June 2016 to 2,875 a year later. The aggregator also originated more loans from the non-majors, with 35% coming in through the smaller banks in Q4 2017, up from 29% in Q4 2016. One in 11 Australian residential mortgages currently come through an AFG broker. Finally, AFG’s normalised net profit after tax increased by 33%, rising to $30.2m for FY17.

AFG GROWS ITS WHITE LABEL LENDING

10.15%

9.70%

9.92%

8.88%

10.57%

9.77%

7.68%

7.86%

8.35%

7.93%

8.59%

8.19%

AFG Home Loans

12%

Dec-16 Jan-17

www.brokernews.com.au

Feb-17

Mar-17

number of interest-only mortgages being written has continued to trend downwards as APRA’s crackdown begins to show. In the AFG Mortgage Index to December 2017, interest-only loans across Australia accounted for 33% of the mortgages lodged in the last quarter of FY17. The decline follows APRA’s move last March to cap the amount of new loans that could be interest-only at 30%. At the time, ARPA said the measure would ensure lenders fully recognised the increased risks in the industry. THE

Source: AFG Competition Index 2017

FIGURES SHOW A DIVE IN INTEREST-ONLY LENDING

Apr-17 May-17 Jun-17

Jul-17

Aug-17 Sep-17

Oct-17

Nov-17

NEWS

MARKET THE DOWNSIDE TO NEGATIVE GEARING negative gearing would boost the average home ownership rate by 5.5% up to 72.2%, according to one recent study. Research from the University of Melbourne found that the majority of Australian households would gain from the removal of negative gearing, with the economy estimated to improve by 1.5%. However, the impact of the increase in welfare would be heterogeneous across households. “Renters and owner-occupiers are winners, but landlords, especially young with high earning landlords, lose,” said the researchers. DISCARDING

BROKER SKILLS IN HIGH DEMAND IN 2018 professionals in the mortgage industry will be welcoming the results of a recent report after it suggested a number of key roles in the sector would become highly sought after in the year ahead. According to the latest data from recruitment giant Hays, mortgage lenders, mortgage processors and mobile lenders will all be hot property in 2018. Nick Deligiannis, managing director of Hays, said the demand reflected the growing need for non-routine workers in an increasingly digital environment. MANY

CBA CHANGES CAUSED FRICTION WITH BROKERS The bank’s focus on proprietary channels could be a reason for its slower housing loan growth introduced by the Commonwealth Bank to its investment lending through brokers last year did ruffle some feathers, according to the managing director of mortgage broker Atelier Wealth. “I do feel CBA could have done a better job in communicating their changes to investment lending through the broker network in 2017,” said Aaron Christie-David. “This was a decision they were forced to make to fit within the APRA interest-only cap, and coupled with CBA’s focus on their proprietary channels, it did rub brokers the wrong way.” Christie-David made the comments in response to a question regarding a UBS note CHANGES

“I do feel CBA could have done a better job in communicating their changes to investment lending through the broker network in 2017” Aaron Christie-David Managing director, Atelier Wealth

citing CBA’s ongoing emphasis on its proprietary channels versus the third party channel as a potential reason for the bank’s slowdown in housing credit growth. CBA’s home lending business grew at an annualised rate of 2.7% in the quarter ended September 2017, according to its 1Q18 trading update, significantly down from the 7.8% it reported for the 12 months to March 2017. Christie-David said he saw the slowdown as a reflection of CBA’s need to tighten credit policies amid sweeping changes in lending. “Just like we run our own businesses, they have commercial interests and high fixed costs – staff wages, a retail network, training, compliance – so it’s

natural for CBA to want a return on their investment,” he said. However, Christie-David said he understood why the third party network’s sentiment towards CBA was poor. “Some brokers will feel CBA doesn’t ‘deserve’ their business, but as an industry we advocate for positive client outcomes, and if CBA is the most suitable lender for our clients, our prejudices shouldn’t impact our clients.” UBS also said in its January note that the bank’s slowdown in home loan growth had led to questions over potential reputational damage following alleged anti-money laundering breaches. “While this cannot be ruled out and is likely to have had some impact, the timing suggests other factors are likely to come into play given the usual 60–90 day period between when a loan is approved and funded onto a bank’s balance sheet,” said the UBS analysts.

VV$40,614,829,064 INVESTOR LOAN APPROVALS DECLINING Source: Bank for International Settlements

$bn 25

Total

20 15

Owner-occupiers*

Investors**

5 0

2005 * Excludes refinancing ** Includes refinancing

www.brokernews.com.au

2009

2013

2017

NEWS

R E G U L AT O R S

MAJOR BANK PAYS $5M FOR LENDING BREACH has admitted to 24 violations of the National Consumer Credit Protection Act and has agreed to pay $5m restitution to about 320 customers for loans taken out through three brokers. ASIC confirmed in January that it was acting against the bank in the Federal Court over loans approved through ANZ’s former car finance business, Esanda. In addition to the $5m, ANZ will offer eligible customers a more favourable loan, provide refunds to some customers, and remove any default listings resulting from the relevant loan. ANZ

ASIC BEGINS SHADOW SHOPPING BROKERS The exercise is part of ASIC’s review of mortgage broking practices in Australia

has launched the second phase of its review into mortgage broking, adopting a mystery shopping exercise to test the sustainability of brokers’ advice. The industry regulator said the move was part of its effort to better understand the home loan purchase process, which goes beyond broker remuneration. “While broker remuneration practices may have an impact on home loan choice, ASIC recognises that a range of other factors influence which home loan products are purchased, and that the purchase experience may vary across purchase channel,” said Michael Saadat, ASIC’s senior executive leader for deposit takers, insurers and credit services. ASIC

BOOSTING ASIC AUTHORITY MAY CREATE DIVISION top law firm has warned that boosting ASIC’s intervention power over financial and credit products could create a “mismatch” between what customers want and what regulators think is best. If proposed legislation goes ahead, ASIC will be able to order the ceasing or changing of conduct it deems potentially harmful to consumers, even if a product complies with the National Credit Code. According to Dentons, problems may arise “because consumers often want to borrow in circumstances where regulators consider they shouldn’t borrow”. A

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The research looks to determine what factors – beyond broker commission – affect which home loan products clients buy, and at whether consumer outcomes could be improved. Within this, ASIC aims to gain insight into how consumers buy home loans, identifying critical points in the buying process, key inputs and decision-making criteria at such points, and how behaviour is influenced during the process. Saadat said ASIC also wanted to understand how the broker shaped which product a consumer bought and whether the advice offered resulted in positive consumer outcomes. These included making an informed choice, buying products that met their needs, and

being provided with the right amount of relevant information to make a choice. The senior executive said anything discovered through the shadow shopping would be “more about understanding to what extent brokers are potentially not meeting their legal obligations, and whether ASIC, for example, needs to produce more guidance around what they can or can’t say to consumers or whether some other action is required”. In the past, ASIC had pointed to record-keeping as something brokers needed to improve on in order to better explain the process that had occurred. “This is not about going into the review thinking that there are significant problems that need to be uncovered; in fact this is about really trying to understand how the interactions between the broker and the consumer are playing out, given that we don’t get any sense of that really from the loan files,” he said at the time.

AUSTRALIA’S HOUSE PRICES EXPECTED TO SLOW THIS YEAR Slow price rises • Home purchase affordability concerns • Strong or improving mortgage performance • Lending restrictions • Cut incentives for home ownership

Position in home price cycle and typical market characteristics

Source: Fitch Global Housing and Mortgage Outlook 2018

Prices falling • Arrears rising • Mortgage stock shrinking • Enforcement process reform • Unwind market cooling measures

Prices bottoming out Accelerating price rises • • • •

Home sales increasing New lending increasing Arrears reducing Stimulate construction

• New lending recovering • Mortgage performance stablishing • Enforcement process reform • Encourage lending and home purchases

CONSUMER SENTIMENT TOWARDS BANKS IMPROVING Source: Annual Edelman Trust Barometer study

Thinking back over the past 12 months, which statement best reflects how you feel about your main bank? Is becoming more customer-focused

63% 77% Helps customer navigate choices and make the best decision for themselves

74% 86% Is more interested in whatâ&#x20AC;&#x2122;s good for customers

44% 55% Makes the effort to understand and address customersâ&#x20AC;&#x2122; unique needs

47%

52%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Jun 2017

Nov 2017

MONEY POURS IN AFTER ASIC MOVE across Australia are enjoying increased investment after ASIC licensed seven crowd-sourced funding (CSF) intermediaries in early January. The new CSF regime allows start-ups and SMEs to raise funds with fewer regulatory requirements compared to other means of public fundraising and is designed to provide them with a new means of accessing capital. Only unlisted Australian public companies can use the fundraising scheme, and they need to have less than $25m in assets and annual revenue to qualify. START-UPS

FE AT URES

SPECIAL REPORT

UNITING A DIVIDED INDUSTRY In his first year as CEO, Mike Felton has led the MFAA and guided the industry through a period of sweeping change, reasoning with groups that were once divided to prioritise unity and cooperation and better the broking industry. But the bulk of the work still lies ahead

MFAA KEY DETAILS

Australia’s peak national body for the mortgage broking industry

More than 13,500 members

The majority of the MFAA board must be active finance brokers

Core focus: advocacy, education, and professional standards

Holds the industry’s highest education standard for finance brokers

www.brokernews.com.au

has been the head of the MFAA for just over a year now, and he still lies awake at night thinking about brokers and their businesses. Felton has steered the association through an exceptionally busy and tumultuous year on the regulatory front following the publication of ASIC’s Review of Mortgage Broker Remuneration and Stephen Sedgwick’s Retail Banking Remuneration Review, and through the formation of the Combined Industry Forum (CIF) and its package of reforms. In an interview with Australian Broker, Felton recalled sitting down and reflecting on the industry before taking the job. It occurred to him then that while it was an important industry full of smart and dedicated people, it could also be an industry divided. “I realised very early on that that type of situation going into a year of unprecedented regulatory change was a great risk, so a lot of my early focus was not only on realigning the MFAA but on ensuring that I did all I could in an attempt to unite the industry in the way that it has approached this task,” he says. He took an active role in uniting the industry through the establishment of the CIF, an unprecedented collaboration between multiple different stakeholders, including lenders, brokers, member associations and consumers. “That coming together of the industry was without a doubt the highlight of last year from my perspective,” he says. Now back from summer break, Felton is ready to go to bat for the MIKE FELTON

industry once again, and it doesn’t look like his and the MFAA’s work is going to let up. In February and March, the association is hosting a number of PD days that feature a regulatory panel discussion to delve into the changes in further detail; the banking royal commission, which will now include brokers; the ongoing implementation of the CIF reforms; and the creation of an ASIC-approved industry code. Despite what’s to come, Felton says the MFAA will continue to “aggressively advocate” and engage with all stakeholders in the industry,

for the industry, Felton says. Self-regulation was considered the best way forward, and so the CIF was born in May to develop a package of industry-led measures to address ASIC’s concerns. “Self-regulation is a highly empowering process in that we as an industry get the opportunity to use our collective knowledge and experience to have the first crack at promoting stronger consumer outcomes and thus protecting our own long-term interests,” Felton says. The CIF had to act quickly to prove to the government that it was serious about its own initiative. Meeting for the first time on 9 June, the group held monthly meetings thereafter and formed specialist working groups. Six months later, on 11 December, the group released its six-point reform package. Those six principles include a standard commission model that avoids financial incentives that

“We do represent the entire industry, but we are cognisant of the fact that individual brokers generally do not have their own seat at the table” Mike Felton, CEO, MFAA including brokers, aggregators, lenders and consumers, to drive sustainability and growth. “We do represent the entire industry, but we are cognisant of the fact that individual brokers generally do not have their own seat at the table.” Behind the CIF reforms Following the release of the ASIC and Sedgwick reviews last year, the industry was at a crossroads. It faced the potential of considerable change with a wide variety of outcomes, many of which could have been potentially negative

encourage consumers to borrow more than they need or will use by basing commissions on facility drawdown net of offset; ceasing volume-based and campaignbased commissions paid by lenders and aggregators; and providing ASIC and consumers with clearer information and data on loans written and commissions paid. Several remuneration models were assessed, including a consumer-paid fee for service, base commissions paid on LVR, and a flat lender fee, but these were deemed to have unintended consequences. “We walked a fine line here

to commission structures and the eligibility of non-monetary benefits, as well as implementing a public reporting framework. While doing so, it will continue to consult with various stakeholders. As these are steps the industry has taken on its own as part of self-regulation, they do not need government approval to begin. However, while the CIF can make recommendations, in accordance with competition law it cannot dictate what or how lenders should proceed. It’s now up to the banks to put the CIF’s principles into practice. “Whilst the CIF has provided common principles as to how industry participants may address risks highlighted by ASIC when it comes to commission structures, it is up to each individual lender to decide how they will apply those,” Felton says. ANZ is the only major bank so far that has publicly announced its amendments to remuneration, which will see the bank pay brokers an upfront commission of 62.5 basis points effective 1 February, up from the current 57.5 basis points. Under the new structure, ANZ will no longer give brokers volume-based incentives. Its trail structure remains the same. Mike Felton, CEO of the MFAA

between trying to ensure that brokers were awarded for the economic value that they produce, but at the same time meeting the non-negotiables that were put forward by ASIC,” Felton says. One of those was ensuring that lenders did not structure their incentives in a way that encouraged the creation of larger loans with large initial offset balances. In its submission to Treasury, the MFAA’s initial position was to ensure brokers were rewarded in circumstances where funds held in an offset account were subsequently used. However, Felton says the collective view of the CIF was that that did not sufficiently address

ASIC’s recommendation on the matter. The group opted for upfront commission to be paid on utilisation of the facility limit drawn down and net of offset account balances. “While everyone recognises that the use of offset is a legitimate choice for customers, one that minimises interest and tax, we had to deal with the guidance provided by ASIC,” Felton says. The CIF stakeholders had to work together and compromise, which is what these processes are all about, he says. In the end, they came up with reforms that Felton believes will have a “manageable impact on brokers”. More broadly, while the changes relate to improved governance

and standardisation of various documents, and processes will take time to implement, the end result should save time and strengthen the industry in the long term. The implementation process While the preparation of the CIF report was a significant task, “the bulk of the work still lies ahead”, Felton says. The CIF’s reform package is expected to be implemented in its entirety by the end of 2020. In the meantime, there are shorter-term milestones to be achieved. This year, the group will provide further detail on the reforms, consider unintended consequences, and begin implementing changes

Forging ahead It’s not only going to be a busy year for the MFAA but also for brokers. Felton recommends brokers read the CIF report and watch the video the group has prepared to ensure they understand the proposed changes. The video is available to members on the MFAA and FBAA websites. He also suggests brokers actively engage with their association, aggregators and lenders to take advantage of the resources available and to remain abreast of the changes and their likely implementation. As the industry evolves and demonstrates what it’s capable of through self-regulation, Felton’s ability to be a scrupulous mediator will likely be more important than ever. AB www.brokernews.com.au

FE AT URES

NE WS ANALYSIS

BROKERS AND THE BUBBLE A UNSW economics professor has sounded the alarm on Australia’s $1.7trn mortgage market, warning that banks, regulators and borrowers aren’t taking the signs of its unravelling seriously enough. Are brokers part of the problem? been much debate among experts over the years about a bubble in Australia’s property market and whether it’s about to burst. It’s not always clear who’s right. What is clear, however, is that the voracity of local and overseas buyers of Australian property is insatiable despite attempts to quell it. Last November, home loan financing reached a record high of $24bn, with nearly 62,000 loans settled, according to ABS data analysed by Finder.com.au. So while there is some evidence that macroprudential measures are starting to take effect, banks are still in the business of lending, and whether borrowers will be able to bear the financial burden in the future is something that has occupied UNSW economics professor Richard Holden. Holden recently sounded the alarm on the Australian property market, warning that it is heading in a similar direction to the US market prior to the subprime mortgage crisis, something he doesn’t think banks, regulators and borrowers are taking seriously enough. And he suggests brokers are part of the problem. “I was a professor at the University of Chicago during the crisis. I watched the mortgage meltdown, the collapse of credit markets, and what was nearly a repeat of the Great Depression,” Holden told Australian Broker. THERE’S

What are the signs? In an opinion piece in the Australian Financial Review, Holden wrote that there were several signs indicating that the Australian housing market was on the same trajectory as the US 16

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market was prior to the 2007-08 financial crisis. According to Holden, those markers include Australian banks’ propensity for high-LVR loans and

is out of control. I think that tighter underwriting standards and macroprudential regulation – some of which we are seeing – are vital,” Holden tells Australian Broker.

“Brokers should get something close to no commissions, or have the commissions deferred and depend on repayment rates over several years” Richard Holden, professor, UNSW interest-only loans, borrowers fudging details about their household expenses and incomes, and borrowers paying very little towards their housing deposit or using funds from unsecured personal loans. “Yes, I think [the property market]

While interest-only loans have declined lately, reflecting APRA’s move last March to cap investor loan growth to 10% and interest-only loans to less than 30% of new mortgages, they still account for a large portion of mortgage lending.

In the latest AFG Mortgage Index to December 2017, which takes into account loans originated by the aggregator’s nearly 3,000 brokers, interest-only loans across Australia accounted for 33% of the mortgages lodged in the last quarter of FY17. “Interest-only loans in Australia typically have a five-year horizon, and to date have often been refinanced. If this stops then repayments will soar, adding to mortgage stress, delinquencies, and eventually foreclosures,” Holden wrote. Holden says the issues he’s identified in the Australian market are compounded by brokers because of their commission structure. “Their incentives are thoroughly misaligned with both borrowers and lenders – just as was the case in the US a decade ago. There are also high-powered incentives for those originating loans with banks,

HOW APAC’S BUBBLE RISK COMPARES Source: UBS Global Real Estate Bubble Index 2017

2.5

bubble risk 1.5

overvalued 0.5

fair-valued -0.5

undervalued -1.5

depressed -2.5

1981 Sydney

1985

1989

Hong Kong

1993 Singapore

1997 Tokyo

2001

2005

2009

2013

2017

creating more moral hazard,” he wrote in the AFR. In a follow-up interview with Australian Broker, Holden said he thought “brokers should get something close to no commissions, or have the commissions deferred and depend on repayment rates over several years”. Holden is not the only one who’s raised these issues. In UBS’s controversial ‘Liar Loans’ report published last year, the bank’s analysts said a third of the 907 mortgage holders surveyed had provided some inaccurate information on their loan applications, with more discrepancies appearing through the broker channel. UBS estimated that $500bn in mortgages were based on inaccurate information. But brokers, broker associations and other academics have different views on the risks in the housing market and the role that brokers play in it. Jeffrey Sheen, an economics professor at Macquarie University, says there are very few similarities between Australia’s market now and that of the US prior to the 2008 financial crisis. That was a problem of subprime lending, much of which came from the shadow banking system and resulted in a significant rise in home ownership among households with low credit scores, he explains. Once interest rates rose, it led to an increase in delinquencies and foreclosures. “Risk assessment of the mortgage portfolios was incredibly bad, leading to underwriting failures,” Sheen says. “We see little of all that in Australia now. Much of the new

growth in lending for property in Australia has instead been from investors who typically have lower price-to-income ratios than the average household. Funds largely come from the main banks.” While brokers could be in a position to encourage borrowers to apply for larger loans than they need, Sheen doesn’t think this is a significant issue in Australia, given the low delinquency and foreclosure rates here. “Large financial institutions dominate Australian lending for housing, and they have sophisticated practices in place to assure good lending. Failures exist, but are not significant now,” he says. While he couldn’t comment on

strong relationships and referral business and positive outcomes,” he says. “If they found wrongdoing, [brokers] face consumer protection legislation, clawback and the potential loss of their business. There is a significant incentive for them to behave appropriately.” According to data from the Credit and Investments Ombudsman, it appears brokers are doing just that. Only 6% of consumer complaints received by the office relate to brokers and aggregators, compared to 46% related to residential lenders. That, along with brokers’ growing market share, which is now at nearly 56%, is a “strong affirmation of the broker value proposition and

STATE ARREARS TRENDS ARE FALLING Source: S&P RMBS Arrears Statistics, November 2017

2.00% Western Australia -0.12% 1.50% Northern Territory -0.07% 1.35% Queensland -0.04% 1.17%

“I can’t comment on brokers’ remuneration structure, though my personal experience is that brokers can and do provide an invaluable link between the borrower and lender” Jeffrey Sheen, professor, Macquarie University brokers’ remuneration structure, he says in his personal experience brokers can and do provide “an invaluable link between the borrower and lender”. MFAA CEO Mike Felton refutes Holden’s arguments about brokers, pointing to the ASIC remuneration review and the Sedgwick report, which found no evidence of systemic harm to consumers. “A broker’s model is based on

the incredible service that they’re providing”, Felton says. “A broker has a responsibility to ensure they are asking the appropriate questions to establish the needs and to match product to needs and to collect the appropriate information for the application and consideration. But at the end of the day, it is the lender who is making the credit decision as to whether or not to lend.”

South Australia -0.10% 0.74% New South Wales -0.01% 0.56% Australian Capital Territory -0.02% 0.90% Victoria -0.04% 0.88% Tasmania -0.01% Note: Movement denotes the month-onmonth increase or decrease in 30+ arrears

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In the broker’s corner In September last year, PJ Patterson experienced a career highlight as a broker. A young first home buyer family approached him after being declined by their bank. He helped them get a $630,000 loan through NAB, and they went ahead and purchased their dream home in country NSW. But this was not just any house: its contents and construction had been entirely donated, and all the funds raised in the sale would go towards the Children’s Cancer Institute. It’s these sorts of positive stories that brokers often remark don’t get told by the media, overshadowed instead by negative criticism and scathing reports. The industry is now keen to respond. “Most brokers put their heart and soul into arranging the most appropriate loan for their clients and do not get paid extra for the tremendous value-add service provided,” says Patterson, CEO of Keystone Financial. Patterson took issue with Holden’s interpretation of brokers and their work, saying that if the professor were to learn more about the industry and the service brokers provide, “I dare say he would retract and revise his comments”. “I would argue that brokers provide more of a handbrake to lending than we are given credit for,” he says. As the first finance professional many clients speak to, a broker often has to lower their clients’ expectations about their borrowing capacity, Patterson says. “There is a huge disconnect right now in the market where consumers think they can borrow a certain amount but in reality they cannot.” What more could be done? Borrowers may not always be accurate on their loan applications, but that doesn’t mean they are intentionally lying or that brokers are complicit in it. Most people likely can’t accurately calculate their household expenses. Therefore APRA recommends 18

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ADIs use the greater of a borrower’s declared living expenses and apply an income and other serviceability buffers. According to research cited in an article on ‘liar loans’ in The Conversation, banks estimate on average $1,637 more for monthly expenses than applicants report. “Based on the bank’s calculations, housing investors underestimate their monthly expenses by A$1,932 on average, while owner-occupiers underestimate by A$1,560 on average,” the article said. The Australian Bankers’ Association told Australian Broker that “banks have strict obligations to lend responsibly and determine whether a customer can afford to repay loans. When it comes to home loans, banks are now typically requiring larger deposits from Australians”. An ABA spokesperson added that, over the past eight years, new loans where customers borrower 80% or more than the value of the property have declined significantly, while new loans where customers borrow 90% or more have fallen to a record low. “Banks are working with representatives from the mortgage broking industry to change remuneration structures to promote better outcomes for customers. This includes changing the standard commission model to

too late. Tighter macroprudential regulation by ASIC is important, including more action, in addition to what they are doing, on interestonly loans,” he says.

“I would argue that brokers provide more of a handbrake to lending than we are given credit for” PJ Patterson, broker avoid financial incentives that encourage consumers to borrow more than they need or will use, for example, by basing commissions on facility draw-down net of offset,” the spokesperson said. Holden says he was aware of the reforms proposed by the Combined Industry Forum. “They are going in the right direction but it may be too little

Sheen, on the other hand, believes the regulators’ macroprudential measures to deal with systemic risks are sufficient and may soon be due for marginal relaxation. “It is time to watch and see how well recently implemented measures work, and be prepared to fine-tune them, which may even mean easing some of the interventions,” he says.

Patterson supports APRA’s measures to tighten lending standards to ensure the health of the market. “We currently have a serious debt problem, and I am glad the regulators are finally doing more about it. However, we must ensure the regulation pendulum does not swing so far towards tightening as to destabilise or harm the industry. For now I think everyone is doing a good job of getting this right,” he says. The only downside is for the consumer who is caught in the middle, Patterson says. “It is now incumbent on every broker to educate their clients about what is happening and why lending has changed.” It’s this complexity that many argue actually reaffirms the role of the broker, making them instead part of the solution. AB

SYDNEY RANKS NEAR TOP OF UBS BUBBLE INDEX Source: UBS Global Real Estate Bubble Index 2017

-0.5

+0.5

+1.5 +2.12

Toronto

+2.01

Stockholm

+1.92

Munich Vancouver

+1.80

Sydney

+1.80

London

+1.77 +1.74

Hong Kong

+1.59

Amsterdam

+1.31

Paris

+1.26

San Francisco

+1.13

Los Angeles

+1.08

Zurich

+0.92

Frankfurt Tokyo

+0.90

Geneva

+0.83 +0.45

Boston

+0.32

Singapore New York Milan Chicago

+0.20 +0.09 -0.66

Bubble risk (>1.5)

Fair-valued (-0.5 to 0.5)

Overvalued (0.5 to 1.5)

Undervalued (-1.5 to -0.5)

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OPINION

GROWTH AMID CHANGE Despite the new challenges emerging in the broking market, growing your business is not an impossible venture. You just need a strong strategic plan. Stuart Donaldson, owner and founder of Banyan Co, explains where to start • How did they become so successful as a finance broker? • My customers need other finance solutions • Maybe I should expand into other products and services • If I could just buy them out, I could eliminate my competition! • What about if I open offices in more locations?

broking industry is in the midst of rapid change. What was once a reasonably simple business model is now far more complex and dynamic. And as broker numbers continue to grow, lending is stagnating. This is a time of intense media influence, regulatory scrutiny, political interference and legislative change. On the horizon, there’s a banking royal commission; continued changes to broker remuneration and lending policies; mergers, acquisitions, enablers, disruptors and many other distractions. In this climate, if you want to maintain or expand your business and stay on track to prosperity, you must be disciplined and structured. Do you need a plan? The answer should be self-evident. Your strategic plan should reflect your expectations and map out the milestones and timelines to get you to your goals. If you have one already, it might be time to review it to strengthen the focus of your core business. You’re fortunate to be in an industry that offers strong support through industry associations, lenders, aggregators and your peers. This support comes in many forms, including education, technology, training, process, compliance and resource libraries. Draw from the industry support, as part of your planning process, and inculcate the best of what they offer. Be focused on eliminating noise and distraction, and be prepared to challenge your thinking. As consultants, we’re frequently asked to help assess growth opportunities. It’s good to be energetic, motivated, creative and passionate about your business and its future. These are all important attributes of successful entrepreneurs, especially when bundled with a dose of focus and, wait for it… a plan. THE

What’s your plan? You’ve been in business for what seems like forever and now you’re gazing at a greener pasture, thinking something like… 20

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Having a process for evaluating growth strategies such as these is essential. The starting point for the process is to assess how the strategies fit within your existing business – initially with its vision and mission. If it passes that test, the next step is to assess how the strategy fits with your

• Mission – Why does your business exist? What does it do for its customers, employees and community? • Objectives – What are the measurable outcomes you seek? How will you know when you have succeeded? • Strategies – What will make the business successful over time? Include both short-term and long-term strategies for achieving your objectives. • Action plans – What work must be done? What is the timeline? When considering which opportunities will become strategies and plans, it is essential that you have a clear understanding of the value the opportunity offers. This requires a thorough and realistic estimate of additional costs, including the infrastructure required, so you can determine whether the opportunity affords a sufficient return on investment. Once you’ve decided to move forward, measure your progress regularly and don’t be afraid to adjust your plan or abandon it completely if you realise the investment is higher than expected or the value is less than you planned. Don’t put your core business at risk by chasing an opportunity based on emotional decision-making. The challenges of expansion The challenges depend on which strategy you implement. It is an insightful exercise to work through the challenges, make a list of them, and research what others have done before you. What are the best practices and

Don’t put your core business at risk by chasing an opportunity based on emotional decision-making

Stuart Donaldson Owner and founder, Banyan Co

existing culture, infrastructure, competencies and financial picture. Draw up a one-page plan that captures the essence of your company. Once you have that, deciding which growth strategies to pursue becomes easier. Do they fit within your plan and move the company closer to your vision? Business plans will evolve over time and should be revisited at least once a year. Your objectives and strategies will change more frequently and should also be revisited and revised at least annually. We recommend writing a one-page plan that documents these core foundations: • Vision – What are you building? A large, multi-licensee operation with significant market coverage? A reliable and caring member of your community? Or a specialist residential mortgage broker annuity stream?

how can I align these to my model? In summary, do not be fooled that the grass is greener. There is no silver bullet, and you cannot build your future without careful planning. You would not renovate or build a house without carefully constructed plans, and your business is just as valuable. It is arguably as important, if not more so, given the intangibles of wiring together people, products, processes, relationships, culture, and financial performance. Those that take the time will reap the reward. AB Stuart Donaldson is an experienced banking and finance executive, educator, business coach and financial advocate for owners of small to medium enterprises. Donaldson excels at taking the mystery out of the numbers with his common-sense approach and always-compassionate personal style.

IN THE NE WS

FROM GREAT HEIGHTS Australian aerial skiing sports legend and La Trobe Financial ambassador, Jacqui Cooper, reflects on her life in the air and her job at this year’s Winter Olympics

more fulfilled. I am a mum to three children, a company ambassador for La Trobe Financial, and I started my own gluten-free product range, Food for Me. I own an event company, am a professional speaker, and have just written two books.

I call that ‘Olympic mindset’ my athletic brain. I didn’t turn it on every day, but I could turn it on when I needed it. For individuals not trained by professional sports psychologists, the best way to get the best out of yourself in work and in life is approaching every day, everything and everyone with a champion attitude. A champion attitude always brings champion results!

What will your role be at this year’s Olympics and what are you most looking forward to about being in that atmosphere again? I am very excited about the 2018 A PyeongChang Winter Olympic Games. I recruited three women into the sport of aerial skiing 10 years ago and all of them have been selected and have a chance to win a medal for Australia. I feel like a very proud mum. Besides being a mentor and part of the cheer squad for the aerial team, I will be co-hosting part of the opening and closing ceremonies and will be an expert commentator for the aerial skiing events. The atmosphere for the winter games is much bigger overseas than it is here in Australia. The Winter Olympics quickly creeps up on us after the Australian Tennis Open; it lasts for 16 days, and then it’s straight on to the F1 Grand Prix and AFL pre-season games. It is hard to get the southern hemisphere to focus on winter sports during the mid-summer. In saying all of that, when the games are on, Australia will have their eyes on our Australian athletes day and night! AB

How have your skills and experiences allowed you to transition from athlete to businesswoman? I didn’t know it at the time, but A everything I was doing in sport was helping me prepare for ‘the outside world’. In aerial skiing I was filling a toolbox with skills that are transferable to business, such as goal-setting, making plans, building a team, managing a budget and my time, working under pressure, processes, outcomes, commitment, leadership and processing feedback.

Jacqui Cooper, retired Australian aerial skiier and Olympic athlete

her 20-year career representing Australia in aerial skiing, Jacqui Cooper has broken her back and her leg. She’s had knee, elbow, shoulder and hip reconstructions, but throughout it all she’s never stopped striving to be the best in her sport, even after a crash forced her to put her dreams on hold for 499 days. OVER

Based on your experiences, how would you suggest people deal with adversity, challenge and change? Resilience is a quality and A attribute that’s there on reflection. Twenty years competing in a very brutal and challenging sport conditioned me to be strong. I didn’t start my career very confident or resilient; the obstacles along the way transformed me. Change is important for the success of any sportsperson or business. If you want longevity and success you have to be willing to change before you

have to. People wait until performances decline before realising change is needed, and then it’s too late. Be ready to reinvent, regroup, reenergise, refocus and retrain yourself many times. How can people who are not professional athletes channel that ‘Olympic mindset’ in their work and life?

You persevered and achieved your sport goals and dreams. What do you dream of doing nowadays? When I was in sport, all I did A was one thing – aerials. I committed all day, every day to my sport. Now that I’m retired, I’m able to do more things and tick more personal and professional boxes. I am

JACQUI COOPER’S SCORECARD

world titles

World Cup wins

World Championship medals

Winter Olympic Games

years as an ambassador for La Trobe Financial

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PEOPLE

Have an interesting deal? Had a particularly difficult or interesting deal? Why not share it with us? Email:

Otiena.Ellwand@keymedia.com.au

A BIG DEAL

Juggling clients with multiple investment properties, unusual employment circumstances and an unsecured business loan proved to be as daunting a deal as it sounds. Adam Bradley, director of Emerge Finance, explains what he learned in working through it Location: Paddington, Qld

THE FACTS

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Goal Investment property

Aggregator Connective

Lender ANZ

self-employed (family trust structure), and tax returns had not yet been prepared. They’d made an offer on the property prior to 30 June and needed tax returns for the finance application. The male applicant worked in the defence force and had complicated deductions and salary sacrifices.

THE SCENARIO

My clients, a young couple living in Queensland, were looking to purchase a sixth investment property for the female applicant to use as her business premises. They already owned five other properties – one owner-occupied residence and four investment properties – many of which were located in Tasmania. They also had an unsecured business loan that had been used to purchase the established business she’d taken over about a year previously. We found out later that this loan was actually secured by their owner-occupied property. The clients found a property that perfectly suited their needs. It could be divided so that the upstairs could be used for her business and the downstairs for a rental unit. The valuation confirmed it was a dual occupancy property, so only a 70% LVR was acceptable to the bank. The complications were income (servicing) and the deposit/closing costs. There were increased requirements based on the 70% LVR. The clients also had unconventional work situations. The female applicant was

Loan size & term $1.2m for 30 years

ANZ small business team to restructure the existing business loan to be unsecured so that equity in the owner-occupied property was available to use. We also had to utilise redraw. which was available in the owneroccupied loan, and a small non-refundable gift from parents to cover stamp duty and closing costs. I liaised with the clients’ accountant to confirm the income being declared was suitable in order to service the new loan. With five other properties (all of which were encumbered), there was a lot of paperwork, with rental statements, existing mortgages, self-employed tax returns, trust distributions and payslips for the male applicant, and multiple deductions, allowances and salary sacrifices. THE TAKEAWAY

In my three years as a broker, this is probably the most complex deal I’ve worked on. At the start it didn’t look like it would be approved due to lots of outstanding information and tight servicing. I broke it down and spoke to all the different parties, and went through the details methodically and diligently. I listed all the hurdles that we had to get past and provided reasonable and logical responses to the lender so we were on the same page. It was also important to manage the clients’ expectations. I wasn’t telling them this would be a guaranteed approval; I was upfront about the things we needed to work through. By working through the barriers and roadblocks we were able to get a great outcome for the clients. The clients were thrilled with the approval and did end up becoming a large referral source for my business. There were many ups and downs with the transaction and lots of adversity, but I learned some valuable lessons on keeping communication open with lenders, clients, solicitors, the

There were many ups and downs with this transaction and lots of adversity, but I learned some valuable lessons THE SOLUTION

Adam Bradley Director, Emerge Finance

In order to satisfy the LVR, we had to use equity from the existing properties. We valued their whole portfolio, and the other investment properties did not have any equity to spare. The owner-occupied property was revalued and came in lower than expected, and we also found out the remaining equity was also being tied up by the unsecured business loan. To resolve this, we had to involve the

accountant and the real estate agent. The female applicant’s business is now renting the property from them, which is a huge reduction in monthly rent based on their previous premises. I am proud and excited that I was able to settle this complex and challenging deal, and have built a strong friendship and business relationship with these clients as a result. They are already speaking to me about their next purchase and telling friends and clients about my services. AB

TECHNOLOGY UPDATE

MICK BRAZEL TELLS US WHY DIVERSIFICATION IS KEY Slipstream founder John Manciameli talks to Mick Brazel, CEO of Clark Pacific Finance

Mick Brazel Mick Brazel

What first inspired you to help your clients with their investment property aspirations? I was largely inspired A by my clients, who were asking me for more information about where they should be looking to buy, or how they should go about investing in property. I’m constantly striving to offer my clients the most informed advice, and so naturally I wanted to educate myself further about the property investment industry, but I didn’t really know where to start.

Why did you choose to work with Slipstream? I’d toyed around with A the idea of going into investment property referral, but I was cautious, as there are many disreputable companies out there. As an aggregator of investment property research houses, Slipstream’s

John Manciameli

accreditation and rigorous onboarding process with the research houses and buyers’ agents really appealed to me as it meant I would have peace of mind when referring clients on to them. I met with a few of the investment research houses and I immediately felt comfortable. What are the key benefits of working with Slipstream? I really enjoy the A professional development days that John and the Slipstream team run for the brokers. We get access to detailed independent information that we can then share with our clients. The content on the day is also delivered in a really easy-to-understand way, so that you are armed with the right language to start conversations with your clients about investing in property right away. The technology methods

that Slipstream teaches, and provides brokers with access to, provide a great way to engage with your clients. I’ve learnt lots of new and innovative ways to market to my clients and prospect databases. It’s crucial to get the back office right first before starting down this road, and Slipstream has made it easy for me to do that quickly and efficiently. What feedback have you received from clients you’ve worked with? I’ve run a couple of A information seminars with the investment property research houses, using the information provided by Slipstream, and my clients have given me nothing but positive feedback. It’s been great to work on long-term investment property strategies with my clients and help them structure their loans in the appropriate way. I feel like I’m truly

helping them achieve their financial goals. How much has Slipstream impacted the bottom line of your day-to-day business? It’s early days but I can A already see the potential of this type of diversification model. It’s a good extension to our current business and will only help us to grow further in the future.

What’s the most important piece of advice you would share with other brokers? Diversification is the only A way to grow your existing portfolio, and for mortgage brokers a natural next step is investment property referral. If we don’t provide the answers to our clients’ investment property questions, they will only seek out the information elsewhere! Information is knowledge and knowledge is power.

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FROM THE FORUM

Top comments from trending stories on brokernews.com.au

MAJOR BANK TIGHTENS SERVICEABILITY REQUIREMENTS

REMOVING NEGATIVE GEARING WOULD LIFT HOME OWNERSHIP

Consumers who apply for a loan through Westpac will now be required to disclose any outstanding debts on digital credit platforms such as AfterPay and ZipPay. The announcement came in a broker note on 11 December, with Westpac saying the move would lead to more accurate assessments of borrowers’ loan serviceability. Westpac also said consumers would be expected to include detailed comments in their applications and provide evidence confirming the amount owing and the required repayments.

The majority of Australian households would benefit from the removal of negative gearing, according to a recent study by Melbourne University. Researchers from the university said scrapping the policy could boost home ownership rates by 5.5% and bring house prices down by 1.2% – in contrast, rents would rise only marginally. However, eliminating negative gearing wouldn’t have a positive impact across the board. “Renters and owner-occupiers are winners, but landlords, especially young with high earning landlords, lose,” said the researchers.

The reality is people adjust their expenditure in order to be able to meet their mortgage. A mortgage becomes a forced savings that is paid first and then discretionary expenditure follows. Of course you don’t want to overextend someone’s ability to service a loan. However, that is why for years we have had a buffered interest rate higher than actual, taking into account potential rate increases. HEM or equivalent, plus a maximum percentage of income to service debt, is as complicated as it needs to be. People’s budgets will adjust with a mortgage, simple.

Take away negative gearing for individuals and all that happens is corporations take over and claim the loss against future capital gains or other business profits inside a business entity. So, once again, small individual investors, most of whom are PAYG and have very few ways of minimising tax, are screwed over and large corporations benefit. Houses prices are where houses prices are because people are willing to pay, not because of any tax concessions. If you want cheap houses, move to the country where there is less competition.

Andrew | 28 Dec 2017, 11:36 AM

Awesome Albert | 16 Jan 2018, 9:38 AM

People taking out a mortgage for the first time adjust their monthly expenses to ensure they meet their mortgage. HEM captures the basic monthly expenses; interest rate buffer provides for interest rate movements and extras. I believe that is sufficient, otherwise we are going to have to have a new additional part to the application listing discretionary items I will give up to make my payments.

This is nothing but a political piece of garbage aimed at votes. Have you forgotten what happened the last time this was done? The consequence will be a rise in rents, making it harder for those who are renting to save for a deposit. We need investors to help the thousands who will never be able to own their own home. Another issue is that property investing is a business. All businesses can write off costs and depreciation and any ‘on paper’ losses. Why should property investment be different?

Salty | 28 Dec 2017, 01:36 PM

GC | 16 Jan 2018, 02:03 PM

Personally, I don’t mind. The more difficult the banks and regulators make the process of obtaining a home loan, then the more relevant my skills as a mortgage broker become, which makes it less likely that technology will take over our role completely (at least for a time).

This is my 24th year as a broker, and I have seen many postsettlement tragedies, usually because of mountains of consumer debt. Some have been saved by consolidation and then return four to five years later with the same problem. Financial literacy is a major issue in this country. There is little or no education in the school system. This is also why so many Australians fall for the get-rich-quick scammers. I am happy with inclusion of day care and streaming and after-pay liabilities as debts. Consumer debt is so easy to obtain that it is the major issue I see daily.

This article is totally incorrect. Abolish negative gearing and here is what would happen: 1. Most investors would no longer be able to sustain, afford, or justify property investment due to the significant cash flow shortfall created by the abolition of negative gearing. 2. Investors would sell their properties, creating an initial oversupply and small drop in prices. 3. Once the oversupply has been sold off, a rental housing shortfall will result which will meet increased rental demand (caused by investors selling to owner-occupiers), thus creating higher rents. 4. Builders will stop building investment grade properties because investors aren’t buying, thus affecting the construction industry. 5. Home buyers will still have the same difficulties buying a home because it costs what it costs to build housing,

Ross | 03 Jan 2018, 10:58 AM

Rob R | 16 Jan 2018, 11:40 AM

WA broker | 29 Dec 2017, 03:17 PM

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CAUGHT ON CAMERA As principal partner of the Perth Scorchers in the Big Bash League, Homeloans entertained guests at matches during the season (KFC BBL|07). Several guests, including mortgage brokers and Homeloans staff, were lucky enough to be invited onto the field to meet some cricketing legends, including Justin Langer and Adam Gilchrist. Homeloans has been a sponsor of the Perth Scorchers for the past five seasons. In Brisbane, the Perth Scorchers played the Brisbane Heat at the Gabba, while in Sydney the Scorchers played the Sydney Sixers at the SCG.

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DATA

WESTERN AUSTRALIA

VIC SPOTLIGHT

Perth may still be a while away from stabilising, but there are seeds of hope in the market

MELBOURNE SURGES AHEAD

“Positive sentiment has been growing in the WA property market as we reach the bottom of this market cycle,” says Allison Hailes, CEO of the Urban Development Institute of Australia (UDIA) WA. “Sales activity and housing values declined in WA over the past two years; however, [these figures] have shown signs of steadying in the last six months with little to no change in the median price of homes in recent months.” While there continues to be debate on how much longer Perth’s down period will last, UDIA notes that new land prices went up by 3.9% year-on-year as of September 2017. The Real Estate Institute of Australia also reported a fairly steady median house price over the September 2017 quarter.

Area

Type Median value

Melbourne is holding to positive, if slowed, growth in the face of lending restrictions and affordability issues

Quarterly

12-month

growth

Perth

$500,000

-2.0%

-2.4%

WA Country

$335,000

-1.5%

-4.1%

Perth

$390,000

-2.5%

-4.8%

WA Country

$245,000

-14.0%

-1.8%

SOUTH AUSTRALIA

Adelaide continues to fly under the radar as a soft market with limited prospects It is not crashing in the same way that Perth and Darwin have been, but buyers are starting to steer clear. “[Adelaide’s] not had necessarily strong population growth. It hasn’t got a strong economy. Construction’s probably been slightly above underlying demand for dwellings for the last few years, so it’s not a tight market,” says Angie Zigomanis of BIS Oxford Economics. Economically, Adelaide has had little to offer in terms of employment opportunities, with only two state infrastructure projects set to commence in the near future. “The main one that everyone talks about will be defence – there are a couple of big naval contracts and submarine contracts,” Zigomanis says. “[However,] we’re not 100% sure on what the impact on Australia will be. There will be extra employment, but how much of it is still open to debate.” Area

Type Median value

investor interest taking a hit as a result of tightened lending criteria, Melbourne has continued to sustain increases in dwelling prices. “Investors are still a stronger part of the Melbourne market than they ever have been, but they haven’t been as big a part of the market as they were in NSW,” explains Angie Zigomanis, senior manager for residential property at BIS Oxford Economics. Concessions from the state government have also helped drive buyer demand. However, with build completions expected to peak in the next year, buyers should expect to see a slowdown. “[The Melbourne market] won’t be that strong over the next 12 months. The weaker investor demand will cause the market to soften, so we don’t necessarily see strong growth coming through,” Zigomanis says. “It may not necessarily experience the declines that Sydney’s had, [but] I think Melbourne is starting to run out of steam as well. You can’t keep going at [a growth rate of ] 10% per annum forever.” The findings from CoreLogic’s October 2017 Hedonic Home Value Index support this, showing the slowest increase in dwelling values in over a year. The report indicates that booming population growth as a result of record migration inflows, high levels of job creation and more reasonable property prices have given Melbourne an advantage over Sydney. Nonetheless, investors may need to be careful. With Melbourne’s average rental yield already being the lowest among the capital cities, market movements that affect capital gains could make investing here risky in the long run. AB DESPITE

Quarterly

12-month

growth

$446,750

-0.7%

2.9%

Median price (houses)

SA Country

$282,000

-4.4%

2.7%

$286,315

Adelaide

$370,000

-3.9%

5.0%

SA Country

$181,000

-11.7%

-0.3%

www.brokernews.com.au

Slowing investor activity leads to increasing demand from first home buyers Although the median property price in Melbourne rose by 8.9% on average in 2017, in the last half of the year there was a marked slowing in growth as investor demand pulled back, allowing an uptick in demand from first home buyers. We expect these trends to continue in 2018. Investor demand will continue to weaken while the participation of first home buyers will increase significantly, thanks to stamp duty concessions and the support of Australia’s fifth-biggest bank, the 'bank of mum and dad'. The net result will be modest growth in general, with the prospect of weakening apartment prices, in particular off-the-plan, given the volume of units coming online. If a drop in prices is to be avoided, it will be thanks to first home buyers and downsizers. Meanwhile, upgraders, seeking to take advantage of continued low rates to trade up to their next family home, will continue to be active. The best-performing part of the market will be 'A-grade' properties, which will see strong demand from investors and home buyers alike, in particular houses in inner to middle suburbs, well situated near public transport, schools, shops and amenities.

Tim Gaspar Director, Hatch Financial Services

SUBURB TO WATCH: WANGARATTA

Adelaide

BROKER PERSPECTIVE

Median price (units) $217,783

Source: CoreLogic

12-month growth

3-year growth

5-year growth

Indicative gross rental yield

1.8%

10.9%

26.0%

5.5%

12-month growth

3-year growth

5-year growth

Indicative gross rental yield

10.7%

12.4%

14.5%

5.6%

AUSTRALIAN CAPITAL TERRITORY

Canberra continues to be a top spot for investors OPPORTUNITIES AND KEY INFRASTRUCTURE

Library love

Station revamp

Ballarat boom

Sports capital

$83.1m slated for Victoria’s state library redevelopment

Restoration of Flinders Street Station transit hub has begun

Two major companies purchase land in Ballarat West Employment Zone

Financial investment announced to complete Melbourne Park redevelopment

HIGHEST-YIELD SUBURBS IN VICTORIA Suburb

Type

Median price

Quarterly growth

12-month growth

Inverloch

$382,500

33%

Merbein

$157,500

-10%

-12%

Nhill

$120,000

-5%

-13%

Ouyen

$97,500

-22%

Dimboola

$120,000

-6%

With the job market expected to remain stable, Canberra’s property market could look even better in the coming months. “Market activity has been incredibly strong. For the 12 months ending August 2017, the 8,250 property transactions was an increase of 89.5% on the previous year – this was the biggest increase in volume of any state or territory,” says Simon Pressley, managing director of Propertyology. “The attraction appears to be employment opportunities. Propertyology has observed an increase in professional services jobs in the private sector, while tourism is also strong, as is the agriculture sector in the surrounding region.” First home buyer activity is picking up as well, with an increase in the number of housing finance loans approved for such buyers in the first quarter of the 2017/18 fiscal year, according to Domain Group’s data scientist, Nicola Powell. Area

Type Median value

Quarterly

12-month

growth

Canberra

$665,000

-1.6%

6.5%

Canberra

$436,000

2.1%

1.2%

www.brokernews.com.au

DATA

QUEENSLAND

With Sydney and Melbourne slipping further out of reach, more buyers are turning to Queensland

CAPITAL CITY AUCTION CLEARANCE RATES

Angie Zigomanis, senior manager for residential property at BIS Oxford Economics, says Sydneysiders coming into the market to capitalise on the state’s comparatively low prices make up a growing proportion of the buyer demographic. “We’re starting to see increased interstate migration flows out of NSW – that’s being reflected in first-time buyer numbers in Queensland,” he says. While CoreLogic research suggests that growth in Brisbane remained low as of October 2017, investors ought to look at Queensland’s prospects from a long-term perspective. “Queensland is emerging as a new investment hotspot driven by affordable pricing, strong interstate migration and high levels of government infrastructure spending,” says James Nihill, managing director of Patrick Leo. The median house price in Brisbane as at November 2017 was $530,000, which should certainly appeal to owner-occupiers and investors from the southern states. Quarterly

12-month

growth

Brisbane

$530,000

0.0%

2.9%

QLD Country

$426,000

-3.2%

1.8%

Brisbane

$410,000

0.6%

-2.4%

QLD Country

$380,000

-0.7%

3.3%

NEW SOUTH WALES

MEDIAN HOUSE AND UNIT PRICES

The crackdown on lending policies is beginning to put a dampener on Sydney’s capital growth

$1,000,000

Type Median value

Quarterly

12-month

growth

$925,500

-12.7%

8.9%

NSW Country

$447,750

-2.5%

7.1%

Sydney

$700,000

-6.8%

4.3%

NSW Country

$390,000

0.0%

5.6%

www.brokernews.com.au

Sold

Not sold

Clearance rate

74.3%

PERTH Total auctions

Sold

Not sold

8 20.0%

Houses

Units

Sydney Melbourne Brisbane Adelaide

Hobart

Darwin

$410,250

$645,000

$475,000

$436,375

$495,000

Perth

$349,000

$365,000

$100,000

$299,000

$200,000

$440,000

$300,000

$486,750

$500,000 $400,000

$678,500

$600,000

$647,500

$700,000

$800,000

Sydney

Total auctions

$900,000

According to CoreLogic’s Hedonic Home Value Index for October 2017, while many regions experienced a slowdown in capital gains, Sydney was one of only three capital cities to record negative growth. “Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan-to-valuation ratios or higher loan-to-income multiples,” explains Tim Lawless, head of research at CoreLogic. “Interest-only borrowers and investors are facing premiums on their mortgage rates, which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties.” This drop in dwelling values in Sydney is the first decline since May 2016, and for Lawless, seeing Sydney in this position is jarring. “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.” Area

ADELAIDE

Clearance rate

$390,000

Type Median value

According to CoreLogic head of research Tim Lawless, housing market activity is generally more sedate from late December through to late January. “Our experience has been that this seasonality doesn’t exert much influence over the trend in hedonic valuations. “While January may deliver additional noise in the indices results, the negative monthly result lines up with recent months, which showed a softening trend, particularly in Sydney and, to a lesser extent, Melbourne. “In the absence of a catalyst to reinvigorate the market, such as lower mortgage rates or a loosening in credit policies, we expect to see a continuation of softening conditions across these markets,” he said.

$526,000

Area

WEEK ENDING 28 JANUARY 2018

Canberra

CAPITAL CITY HOME VALUE CHANGES Capital city

Weekly change

Monthly change

Year-to-date change

12-month change

Sydney

-0.2%

-0.7%

1.4%

Melbourne

-0.1%

-0.2%

8.1%

Brisbane

0.0%

2.2%

Adelaide

-0.1%

-0.2%

2.5%

Perth

-0.1%

-0.4%

-2.6%

-0.1%

-0.4%

3.3%

Combined 5 capitals

*The monthly change is the change over the past 28 days

BRISBANE CANBERRA Total auctions

Sold

Not sold

Total auctions

Sold

Not sold

Clearance rate

90.9%

Clearance rate

76.7%

SYDNEY Total auctions

Sold

Not sold

Clearance rate

87.9%

TASMANIA

MELBOURNE Total auctions

101

Total auctions

Sold

Not sold

Clearance rate

82.7%

TASMANIA

Area

Hobart maintains its winning streak as the strongest capital city in Australia With property prices increasing by 12.7% over the 12 months to October 2017, according to CoreLogic, Hobart has held its position as one of the top capital cities in the country. “Hobart is benefiting from renewed housing demand in the form of interstate migration, particularly Sydneysiders and Melbournites who appear to be utilising their enhanced wealth positions to buy very well in Hobart, where housing prices are substantially lower than those in Australia’s largest cities,” says Tim Lawless, head of research at CoreLogic. While the majority of the Apple Isle’s growth has been concentrated in Hobart, the countryside is also picking up, albeit at a slow pace. Over the year ending October 2017, regional Tasmania recorded a 5.4% increase in prices.

100.0%

Type

Median value

Quarterly growth

12-month growth

Hobart

$390,000

-1.3%

6.3%

TAS Country

$270,000

-1.8%

3.8%

Hobart

$309,000

8.0%

2.4%

TAS Country

$229,000

-6.5%

5.6%

All data sourced from CoreLogic.com.au

www.brokernews.com.au

PEOPLE

IN THE HOT SEAT Lloyd Thomas, director of DPN, talks about starting his first business as a 10-year-old, and challenges brokers to reach an ambitious goal by 30 March

Who or what inspired you to become a broker? I’ve always had a keen interest in wealth A creation and a love of property. Mortgage broking seemed like a natural fit, an industry in which I could really make a difference to others, helping them live the life they want.

What was your first job? My very first job as a 10-year-old was A on the bread delivery run. It was great fun and good exercise, riding on the back of the truck and running from house to house. I did this before school from 6am to 9am, and from an early age it taught me the benefits of working hard and earning an income. My entrepreneurial spirit was evident as a 10-year-old: I started a stationery rental company, my first business. I rented pens, erasers, highlighters, etc., to kids at school. I was very popular and made a small fortune. (Well, it seemed like it at the time!)

Do you have any tips for other brokers about starting the year off right? I can recommend three key things – firstly, A work towards getting in front of 30 new potential clients before 30 March. Secondly, don’t be afraid to call on your networks; if you are friendly and genuine, people will respond to you. Finally, I believe goal-setting is really important. Make your goals specific, write them down, own them and commit to achieving them.

What’s one thing, personal or professional, that you hope to achieve in 2018? Personally, I’m really excited to build my new home this A year, and professionally, I look forward to meeting many more new people, introducing DPN and our expertise, and helping them get closer to their goals than I did in 2017. AB

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