Australian Broker magazine Issue 7.13

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ISSUE 7.13 July 2010

Questions raised over credit model

Mark Hewitt

 Does the new

registration regime give away trail book rights for brokers?

Concerns have been raised that brokers could be giving away the rights to their trail book if they choose to become credit

representatives of aggregators under the new registration regime. Questions have been raised with Australian Broker over what would happen if, under the new regime, a broker chose to become a credit representative of one of the aggregators rather than seeking their own licence.

There is confusion in the industry over the legal ownership

of the broker’s trail book if a broker become a credit representative of an aggregator, rather than obtaining his or her own licence.

It has been suggested that the aggregator, rather than the broker, would own the rights to the trail book. This could mean that the broker would be unable to sell on his or her trail book, or would be unable to take it with them if they move to another aggregator or organisation.

Mark Hewitt, Australian Finance Group’s general manager of sales and operations, told AB that the new regime would not lead to any changes from AFG’s perspective. “The licensing option selected by our members will not result in any changes to their current individual arrangements in relation to trail ownership,” he said.

A spokesperson for Advantedge said only that its priority has been assisting brokers with the registration phase of the new legislation, and it would be rolling out details of its credit representative option later this year. Advantedge did restate its commitment to supporting both licensee and credit representative models, however.

Jon Denovan, senior partner at Gadens, thinks it unlikely that brokers would lose their trail rights, but it depends on the contract with the aggregator. page 18 cont.

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ASIC updates credit licence guidance Updated guidance for credit licencees has been provided by the national regulator in light of recent legislation changes Page 14

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Affordability still an issue in Sydney Sydney homebuyers remain affected by high prices in the country’s largest property market Page 16

>>

Set for a double dip?

AMP chief economist Shane Oliver looks at some of the leading economic indicators to see if there are concerns about a return to recession Page 24

>>

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News

We’re back, say mortgage managers and non-banks

Ken Sayer

Mortgage managers and non-bank lenders claim they have begun to strip banks of market share lost during the GFC, in an exclusive interview for Broker News TV. Mortgage House managing director Ken Sayer, Acuity Funding managing director Ranjit

Thambyrajah and Australian First Mortgage director David White have all said competition for Australia’s major banks is fast returning to the market.

“Mortgage managers are in full flight right now,” Sayer told the industry’s leading online video portal. “The banks’ market share has peaked, and non-banks and mortgage managers are taking some of it back as we speak.”

Thambyrajah agreed and also said funding is becoming easier to obtain at the same time as banks are tightening their policies on loan volumes and broker expertise expectations, giving mortgage managers a chance to step back in.

These re-energised market competitors are being successful in “just doing what they did before”, according to Sayer, making efforts

Mortgage manager tempts brokers with cash The NSW licensee of Queenslandbased mortgage manager, Mortgage Brokers Alliance, is hoping that the lure of cash back for the Australian Credit Licence and industry membership fees will be enough to tempt brokers into directing business its way.

The subsidiary, called one26 mortgages, is promising brokers $2,000 towards the cost of their ACL fee and FBAA/MFAA membership fees. In order to qualify for the offer, however,

brokers have to settle at least $2m by the end of the calendar year.

Michael Flude, a partner at one26 mortgages, said the mortgage manager also promises to process commission payments to brokers two days after settlement, allowing them to receive their remuneration faster than larger lenders. “[We] continue to strengthen our relationships with brokers and we believe that our current offer will be a tremendous help to the small and mid-size brokers that are being

to work more closely than the banks do with their clients and brokers.

White said non-banks “will be there going forward”, and that the non-bank lender has already experienced loan volume increases at the banks’ expense. He predicts that non-banks will begin eroding the major banks’ 90% stranglehold on the mortgage market.

White said although “the public ran scared” from alternative lenders in the past due to rate rise fears, Westpac’s recent 20 basis point move above the RBA rate has changed that perception, leading them to think there is a “better alternative” now that mortgage managers and non-banks are back in the market. “The public thought well, hang on a minute, maybe they are all the same, and I’m not going to stand for that,” White said. neglected by the major banks,” he said. “This valuable segment of the broker market has been underserviced for too long and we look forward to working with these brokers to help them grow their businesses and assist them with the new licensing requirements.”

Flude said the service will allow brokers to have greater control over their business cash flow so they can concentrate on writing more loans.

One26 mortgages’ commission rates are currently 0.7% upfront and 0.2% trail. Flude said there is no cost for accreditation and, unlike some of the major banks, there are no minimum volume requirements to be met.

www.brokernews.com.au Publishing director.... Justin Kennedy Managing editor.....George Walmsley Editor..................................Ben Abbott Contributing editor....... Luke Cornish Production editors......Jennifer Cross ...........................................Carolin Wun ........................................ Moira Daniels Design manager..... Jacqui Alexander Designer...................Jonathan Phillips HR manager.................. Julia Bookallil Marketing coordinator...Anna Keane Traffic manager............. Stacey Rudd Advertising sales Simon Kerslake t: 02 8437 4786 f: 02 9439 4599 simon.kerslake@keymedia.com.au Rajan Khatak t: 02 8437 4772 f: 02 9439 4599 rajan.khatak@keymedia.com.au Editorial enquiries Ben Abbott t: 02 8437 4716 f: 02 9439 4599 ben.abbott@keymedia.com.au Distribution Australian Broker is available by subscription. E-mail all subscriptions. and mailing enquiries to: subscriptions@keymedia.com.au t: 02 8437 4731 f: 02 8437 4753

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Could high exit fees be illegal?

The exit fees charged by some lenders may be illegal, according to a report published by the Melbourne Law School’s Centre for Corporate Law & Securities Regulation.

The research paper, which examines total exit fees for variable rate mortgages, is arguing that the average fee charged by lenders that are non-authorised deposit-taking institutions (non-ADIs) dwarf those of other institutions. The report estimates that the average exit fee charged by a non-ADI for a $250,000 variable rate loan terminated within three years totals $1,900, in contrast to the

rates charged by large banks ($680), other banks ($589) and credit unions ($420).

It also reports that these high exit fees could even be illegal, as the charges levied may exceed ‘a reasonable estimate of the credit provider’s loss arising from the early termination or prepayment’ as stated in the Consumer Credit Code. They may also be in breach of the responsible lending requirements contained within The National Consumer Credit Protection Act 2009.

The report concludes that the compulsory licensing regime brought in by the Act may exert downward pressure on exit fees so

that they accurately reflect credit providers’ actual losses, as has been the case in the UK. Even so, the report still calls on ASIC to issue guidance about how exit fees charged by a credit provider should be calculated.

Brokers’ views on the subject are mixed. Michael Searle, senior consultant at the Home Loan Centre in Canberra, thinks the fees are high, but can play a useful role.

“Without exit fees, you’ll just end up with a situation of constant churn in the market,” he said. “Exit fees should be high for the first 12 months of a loan – around $1,500, for example – but

should then reduce quickly, to about $300 after two or three years.”

Peter Millett, principal of Premium Private Finance WA in Perth, doesn’t think that the question of exit fees even enters many borrowers’ minds when taking out a home loan.

“In my experience, clients don’t rate exit fees in their top two or three concerns: they’re more worried about flexibility, the competitiveness of the variable rate, the overall package and whether there’s a $10 monthly fee.

“I’d be surprised if many borrowers see it as much of an issue,” said Millett.

Licensing could lead to market consolidation The new broker registration regime that came into force on 1 July is likely to lead to further market consolidation, says Citibank’s Head of Mortgages.

Steven Ramage believes that the introduction of the national credit regulations, which requires brokers to be registered with ASIC by 1 July, could lead to some brokers “seeking the efficiencies of aligning to larger groups”.

“We’ll also see ‘part-timers’, as they’re sometimes called, drop off,” said Ramage, “For example,

where there are small networks of a few people working for a lead broker, there may well be some consolidation at that level.”

Ramage also commented that many of the aggregator groups and banks are working with their members to ensure they are registered by the deadline.

“There’s a lot of inward focus at the moment,” he added.

The president of the FBAA, Peter White, agrees that there may be consolidation within the market at a certain level.

“Your typical one-man band will find that he or she is already complying with 80% of the requirements; meanwhile, your large outfits are likely to have a dedicated compliance department to deal with it,” he said.

“The people that may face ongoing problems are those that have, say, five or six people working for them. That’s a part of the market in which we may see some consolidation in coming months.”

White also commented that

Steven Ramage

there are other preferences ‘coming through’ for brokers operating in that part of the market for whom consolidation may be an unattractive option.

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European money heading this way Patrick Tuttle

Pepper purchase to lead to product push The buyout of Pepper Homeloans, orchestrated by the management team along with institutional and individual investors, will result in a revamped company ready to reclaim its spot at the top of the non-bank lending sector.

“This change of ownership is a logical next step in Pepper’s development,” said Pepper CEO Patrick Tuttle. “The specialist consumer finance and debt capital markets experience of our senior management team, and the new Pepper Singapore shareholders, will be vital in taking the business to the next level.”

Tuttle said that this means creating a stronger, more diversified non-bank financial institution, with the capability to originate, service and manage a broader range of financial assets.

The company was attractive to the overseas investors due to its resilience in seeing out the GFC, founder Michael Culhane said.

“This has made Pepper an attractive investment – despite the difficult economic climate resulting from the GFC,” he said.

“This acquisition is testament to Pepper’s strong track record in the Australian residential mortgage lending and RMBS markets, and the bench strength of management

and employees.” But the change in ownership will not involve any operational change for customers, business partners or service providers, Tuttle said.

“We will continue to provide innovative lending products to under-served segments of the Australian mortgage market, including self-employed and small business owners, and those high quality borrowers no longer readily able to access credit due to ever-tightening lending criteria being imposed by mortgage insurers and authorised deposittaking institutions,” he said.

The deal will enable the business to further diversify the range of financial products and services that it currently offers with the support of its existing distribution and wholesale funding partners.

Pepper was acquired by Pepper Singapore, a special purpose holding company incorporated in Singapore. Pepper Singapore is owned by an investor group consisting of institutional and high-net worth investors who have extensive experience in developing, managing and owning businesses across a range of industry sectors, including consumer finance and the global debt capital markets.

Major European investors want to release a “wall of money” into the Australian mortgage market, according to Kim Cannon.

Cannon recently attended one of the world’s major investment forums, Global ABS 2010, in London. The managing director of lender FirstMac said the attractiveness of Australian mortgage-backed securities is the main story emerging from European investment markets and could have major benefits for lending competition in Australia.

Cannon said European investors are now calling for the federal government’s Australian Office of Financial Management (AOFM) to consider supporting foreign currency transactions to help European investments flow into Australian mortgage-backed securities.

“There is a wall of money that investors want to release from Europe into Australian mortgages,” Cannon said. “The cost of swapping from Euros into Australian dollars, however, is the major limiting factor. The Australian industry attending the forum is trying to devise innovative ways to facilitate European investment at the right

Kim Cannon

price,” explained Cannon. The prospect of European investment in Australian mortgage-backed securities would be extremely positive for competition in the Australian lending market, levelling the playing field for non-bank lenders who are competing with the funding options that the major banks enjoy.

“It will open up competition in the Australian market again,” Cannon said. “European investment would allow the non-bank and regional banking sector to seriously challenge the dominance of the major four banks.”

Cannon said he had met with most of the major investors in residential mortgage-backed securities (RMBS) from Europe, as well as the US. He said every meeting with these overseas investors has been positive – they have enormous respect for the AOFM and its initiatives to support RMBS issues to help increase competition in the Australian lending market.

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As fixed rates fall, gap narrows

National Australia Bank and Bankwest both brought fixed rates closer to parity with variable rate mortgages, via a price reduction on a number of products. Bankwest moved first, reducing rates on its three and five-year fixed rate home loans. It was closely followed by NAB, which knocked 0.2% off both its standard fixed rate and packaged three-year fixed rate products.

Bankwest’s three-year standard fixed mortgage rate was reduced from 7.64% to 7.38% pa, while its five-year standard

fixed rate home loan rate was cut from 8.09% to 7.89%. The move

by NAB meant that its standard fixed rate loan sat at 7.49% and its packaged three-year product fell to 7.39%.

Head of mortgages at Bankwest, Dean Gillespie, said that the bank reduced rates on its most popular fixed products to try and wrestle business away from its Big Four rivals.

“We have certainly seen an uptick in popularity of fixed rates in the last few months,” he said.

“Obviously, we saw the first RBA

SEQUAL appoints compliance chair Jon Denovan has been appointed as acting chair of SEQUAL’s compliance committee. He is considered to be an authority on compliance, procedures and documentation in the mortgage industry.

The industry body’s CEO, Kevin Conlan, said the appointment would bolster SEQUAL’s efforts to encourage high standards of practice in the reverse mortgage market.

“SEQUAL has introduced a

number of significant selfregulatory initiatives, and we welcome the appointment of Jon Denovan as part of our ongoing commitment to ensuring that consumers can rely on high professional standards of practice within the Australian equity release market,” he said.

“I’ve worked with SEQUAL since its formation and so have a long history with the reverse mortgage market in Australia,” said Denovan.

move upwards at the end of last year and it’s taken two or three months for any real demand for fixed rates to come through.”

A NAB spokesperson said the bank’s move reflected a drop in the three-year interbank swap rate since May, which is what the lenders use as a starting point when setting their fixed lending rates.

A report by Canstar Cannex found that the moves mean that fixed and standard variable rate products are now almost sitting at parity. The gap between the two types of products has narrowed to within 16 basis points on average, which equates to only about $26 on a $250,000 mortgage.

“Borrowers could see this as an opportunity to reduce the risk of fixing but they need to be aware that fixing a home loan is a long-term decision and very much a gamble, so it really does depend on your own individual circumstances,” said Mitchell Watson, financial analyst for Canstar Cannex.

“Properly used, a reverse mortgage is a very important product which will grow in utility as Baby Boomers age.”

He also said that SEQUAL has an outstanding record as an industry board, setting high standards which at the same time protect consumers while recognising the commercial requirements of lenders.

He added that he is very pleased to be able to contribute further to the industry.

Outgoing chair Kieren Dell, who is retiring from SEQUAL, said that it has been pleasing to see the reputation of the seniors equity release market grow rapidly under the protections of SEQUAL’s code

Dean Gillespie

“For instance, we saw people rush to fix in October 2008 when they expected rates to soar.

Instead the reverse happened and they ended up worse off than those on variable loans.”

Borrowers taking out a threeyear fixed loan in October 2008 will be out $9,600 in monthly payments, while those who fixed for the same period in April 2009 are ahead by $1,400.

Jon Denovan

of conduct, and that SEQUAL is in ‘the best of hands to continue this important work’.

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Regulation changes set in stone A new amendment to the National Consumer Credit law has been passed to ensure that lenders and brokers will be allowed to obtain new business through existing networks.

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen said that a few safeguards were put in place but that the changes would ensure there would be minimal disruption for brokers when the new regulations come into play.

“Importantly, lenders and brokers will be able to continue to receive referrals from businesses while consumers remain protected under the National Consumer Credit laws,” Bowen said. “However, a person must give their consent before their contact details can be passed on and banks and brokers can follow up such referrals.”

The changes support industry practice – such as when community or sporting organisations refer their customers’ details to credit and

credit assistance providers who many subsequently contact the customer.

The new regulations will also impose conditions and safeguards on lenders, brokers and referrers to ensure consumers are not harassed or pressured into credit that they are not seeking.

The government has instituted a three-month transitional period for the industry to adapt to the changes. Any additional requirements of referrers and licensees will not commence until 1 October.

Other amendments to the regulations allow special purpose funding entities that are credit providers or lessors for nonbanks to operate without holding an Australian credit licence.

Bowen announced the changes which include an exemption to special purpose funding entities (SPFEs), which was made in an effort to remove unnecessary barriers in credit markets to facilitate greater competition.

Chris Bowen

“These amendment regulations underscore the government’s commitment to continue to work closely in consultation with industry and other stakeholders to achieve the best regulatory balance and outcomes for the community,” Bowen said.

In addition, the government has introduced a number of other amendments aimed at unlicensed lenders and lessors with carried over instruments.

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ALCo warns about ‘enormous impact’ of new regulation Australian Loan Company (ALCo)’s general manager is warning brokers not to underestimate the requirements of the new consumer protection regime. Lesley Wood believes that the impact of the National Consumer Credit Protection Act will be ‘enormous’ and that many brokers and aggregators have underestimated what they will be required to do.

“The legislation is a good thing for industry, and will strengthen the relationship between broker and customer, but parts of the industry do not really understand which requirements are going to affect their business as of 1 July,” Wood said.

“While not all obligations come in until 1 January next year,

some are effective as of July – and you have to be able to demonstrate to ASIC that you’re meeting those obligations.”

Wood added that the indications are that ASIC will be “very serious” about enforcing the legislation: however, she also believes that the regulator could be doing more to educate the industry. “ASIC has been very prescriptive in what documents need to be provided to the customer, but hasn’t provided much detail about what should be contained within those documents,” Wood said. “ASIC should be coming out with more detail around this area.”

One of the actions ALCo has taken in advance of the new legislation’s commencement is

the launch of an online training program to help its members cope with the new consumer protection regime.

The training program is delivered via online video and followed up with webinars, and focuses on the new compliance documents, Wood said. ALCo is also offering face-to-face training but has found that the online tool is very effective for regional and time-poor members.

“It’s very important for brokers to align themselves with the right aggregation group at this time,” Wood explained. “Brokers should be looking for a partner who will help them take their business forward and help them comply with the requirements of the new regime.”

Lesley Wood

Lawfund changes name to Firstfolio Aggregation Reflecting a change in business direction, aggregator Lawfund has been renamed Firstfolio Aggregation.

Lawfund was purchased by Firstfolio in 2006 and has a history of developing its business leads through referrals from lawyers and solicitors, said Firstfolio general manager of third party distribution, Andrew Russell. However, a focus on growth areas meant that the company will now operate under a new banner.

“The nature of that brand was a referral-based model through solicitors and lawyers, but as the business grew into the Firstfolio mould that brand was not reflecting where our business was going. We changed

the name from Lawfund to Firstfolio Aggregation,” Russell said.

“The lead flow still comes from that legal hub but the new segment where we see the strongest growth is in our premium offering.” That premium offering is by way of Firstfolio One, which Russell said is aimed at top brokers.

Those high-profile brokers are ranked on a range of metrics – not just volumes – so brokers with a high conversion rate are also considered to be top brokers.

However, Russell said that some brokers that want to join the Firstfolio family are being denied the chance by aggregators dragging their heels about releasing them.

“Everybody’s working very hard at the moment to meet the 1 July deadline and there is a lot of administration that is behind that,” Russell said.

The better aggregators have got online systems and it’s just a matter of collecting information and passing it on to the lenders or ASIC. Others that don’t have those systems have been completely bogged down through that process and if people are asking to switch aggregators and are asking for the letter of release they’re being told by their aggregator that they’ll be some time in processing because of the focus on the NCCP.” Russell said that Firstfolio One now has 70 high-performing

Andrew Russell

brokers signed on and that there was still strong demand for premium aggregation services.

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Banks to expand crossselling incentivisation Increased cross-selling of products via the broker community will be a major plank in mortgage lenders’ strategies in the coming months – and brokers will be incentivised accordingly, said Citibank’s head of mortgages, Steven Ramage.

At a June roundtable event he argued that using the broker community to cross-sell products – including products bundled with mortgages – will be a key to lenders’ strategies going forward.

“Forty to forty-five per cent of loans come through mortgage brokers: it’s a big part of the market,” said Ramage. “The question is now ‘how can you use brokers as a distribution channel to encourage customers to take up more than just a mortgage? ’ “A lot of the remuneration schemes in place are focused

towards that: essentially paying more if a broker can sell more products or cross-sell the right products that will give you more revenue across the board.”

Such schemes could be either direct or indirect, said Ramage. While Citibank is choosing to reward brokers indirectly through a scorecard system, where brokers will fall into different commission categories according to various criteria (including bundle sales), other banks have chosen to follow a more direct route.

Citibank has been working hard to ensure that any remuneration structures are in line with the National Consumer Credit Protection Act 2009 – although ASIC has not been vetting these directly.

“It’s up to us to make sure we comply with what ASIC want,” added Ramage.

“Therefore, we work very closely with our legal and compliance teams in developing these packages and structures, because we want to get it right.”

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ASIC updates credit licence guidance Rates headed for a fall The Reserve Bank of Australia has likely reached the peak of its tightening cycle, according to one industry leader. Loan Market executive chairman Sam White said official interest rates now seem more likely to come down than go up.

White said the six increases applied by the RBA since October last year which lifted the cash rate to 4.5% have successfully slowed economic activity.

However, he said that rates will probably stay on hold for the time being at least. “The fact that the RBA moved so early in the cycle means that interest rates are

Sam White

going to be on hold now for some time,” he said. “And I think for the first time in over a year there’s a significant chance now that the next interest rate move will be downwards.”

White said Loan Market brokers were recommending that their clients should be looking to pay more off their loans and other debts while rates stay on hold. “[We tell them to] start to move it from high interestbearing debt like credit cards and put it onto their mortgages and hopefully pay that debt down as fast as possible,” he said.

White also dismissed the possibility that Australia could follow in the footsteps of the UK and US and have a property slowdown.

“One of the big things to prove that we’re not in a housing bubble is the fact the banks have been a lot tougher with lending money over the last couple of years than a lot of their counterparts [have] around the rest of the world,” he said.

“So we didn’t see a lot of people buying houses that shouldn’t have been able to – and that indicates that we’re not really in a bubble.”

The body responsible for overseeing the new consumer credit protection regime has issued updated guidance for credit licensees.

ASIC has re-released six guides, primarily to incorporate references to several pieces of legislation that have been made since the guidance was originally published last December.

ASIC is at pains to point out that the revised guides refer to particular regulations affecting lenders with carried over instruments (COI): namely, a contract that was made and was in force immediately before 1 July 2010 and subject to the old Credit Code (the Uniform Consumer Credit Code).

The guidance relating to responsible lending conduct has also been amended, so that it refers to recent regulations that extend the amount of time available to assignees of credit contracts to provide the original assessment of whether the credit is ‘not unsuitable’ when requested by the borrower.

However, ASIC maintains that changes made to the regulatory guides ‘do not represent substantive changes to ASIC’s current policies and approach to administering the new National Consumer Credit regime’.

Updated guides are: • Regulatory Guide 202: credit registration and transition • Regulatory Guide 205: credit licensing: general conduct obligations

• Regulatory Guide 206: credit licensing: competence and training • Regulatory Guide 207: credit licensing: financial requirements • Regulatory Guide 208: how ASIC charges fees for credit relief applications • Regulatory Guide 209: credit licensing: responsible lending conduct ASIC has also re-released Pro Forma 224 (Australian credit licence conditions) which updates information first released on 8 June. This guide has been amended to align the standard licence conditions with the experience, training and continuing professional development requirements for responsible managers of mortgage brokers set out in Regulatory Guide 206, and the minimum requirements for adequate professional indemnity insurance set out in Regulatory Guide 210.

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Liberty makes move into reverse mortgage market Liberty Financial has made its first step towards a full equity release product offering after launching a new aged care accommodation funding product.

John Mohnacheff

The new product, named Care, is a funding alternative which is specifically designed to assist those borrowers wishing to finance an accommodation bond

to enable them to move into an approved aged care facility, by accessing some of the equity in their own home.

“This is just another example of Liberty’s ability to provide diversity to the market,” said group sales manager John Mohnacheff. “Care fills the gap that has been left by many lenders who have exited the market in recent times.”

In fact, many funders have left the reverse mortgage market in recent times – most notably the leading lender RBS which is having its Australian assets sold as part of the UK government’s plan to focus the bank on domestic lending.

However, despite the number of high-profile providers leaving the reverse mortgage market, the segment continues to grow and hit a total outstanding value of $2.7bn by the end of last year.

Liberty’s aged care product has an interest rate of 8.50% and a

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maximum LVR of 40% plus prepaid interest. The move is seen as signalling Liberty’s continued expansion of its lending portfolio, which now includes business finance and motor vehicle finance in addition to its commercial and residential mortgage business.

General manager of personal business, Kendall Mahnken, said the creation of the Care product would help make the transition to moving into aged care easier.

“Making the decision to move from your home into aged care is a difficult and stressful one,” she said. “Care eases the burden by providing a fast-turnaround financing solution whilst allowing the borrower and their family time to consider their options.”

 This is just another

example of Liberty’s ability to provide diversity to the market. Care fills the gap that has been left by many lenders who have exited the market recently

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Affordability issues impacting Sydney market The Sydney property market is being limited by affordability issues, say property experts and economists who gathered at WBP Property Group’s annual breakfast discussion.

Speaker Justin Smirk, chief economist for St.George Bank, told attendees that affordability in the NSW capital is stressed.

“Prices in Sydney can increase in suburbs quicker than expected due to factors such as migration and an influx of high-income purchasers, adding further pressure to affordability,” he said.

However, according to Aussie Home Loans founder John Symond, there is no reason to expect a crash. “We aren’t going to see a crash and there is no bubble, however, property prices cannot sustain the levels of growth seen in Melbourne and Sydney in recent times. But

fundamentally, conditions are pretty healthy and we won’t see prices fall away.”

Symond outlined concerns that the coming federal election will bring about a flood of bad news that could affect confidence in the market. “And if history proves correct we will witness a reduction in housing activity in the next six to 12 months.”

WBP Sydney residential property valuer Chris Lackey confirmed there has been strong growth across the board in the last year. “The Sydney market has seen growth in excess of 14% since the beginning of 2009,” Lackey said. “Commencing initially at the bottom end of the

John Symond

market, the trend in rising values led to a recovery in the city’s prestige markets, despite reduced activity levels from cautious buyers.”

 We aren’t going to

see a crash and there is no bubble

Insurance poised for strong growth in FY11

Mortgage brokers looking to diversify their revenue streams could do worse than looking at offering insurance products, according to a report by IBISWorld. The research house predicts that insurance broking will experience strong growth in revenue in the next 12 months –

rising 7.2% to $11.2bn.

“There will be rapid growth in premium pricing as Australian insurance carriers strive to recoup underwriting capacity lost on recent investment activities,” IBISWorld general manager Robert Bryant said.

“This will result in substantial

revenue growth for brokerage firms since brokers earn commissions on the size of the premiums written.”

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

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

He predicted that insurance broking would be the third “hottest” industry in the next 12 months, coming behind organic farming and online information services and just ahead of mobile telecommunications carriers and alternative health therapies.

ALI Group has recently called

on brokers to adopt mortgage protection as an integral part of their service proposition. “A mortgage broker is setting someone up with a large amount of debt, therefore it’s only reasonable for them to help guard against their inability to meet their obligations in the event that their client were to become seriously ill or die,” said ALI head of sales, Darren Smith.

Smith said the repositioning comes as a direct response to mortgage broker feedback. He said the complexity typically associated with more traditional life insurance offerings often results in no insurance being taken out.

“It’s now more important than ever for brokers to be providing real value and full service to their clients in order to secure a sustainable future,” Smith said.

“If they don’t someone else will.”

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Borrowers shrug off rising interest rates

Australian borrowers are financially aware that the GFC hasn’t changed their attitudes towards debt, according to a recent survey. More than threequarters (78%) of those surveyed

by Club Financial Services said they felt the same way about borrowing as they did preSeptember 2007, when

international financial markets collapsed.

The national mortgage broking firm conducted the survey in South Australia, Victoria and NSW to gain an insight into the financial mindset of average Australians. Around 82% of those surveyed had home loans, and almost half of those owe between $100,000 and $300,000 on their mortgages. Still, a sizable 19% had borrowings in excess of $700,000.

Club director Simon Norris said the attitude towards debt was interesting given that Australian household debt was high by international standards, surpassing the figures for the US and UK. He said rising interest rates also did not appear to be causing alarm amongst respondents.

With refinancing being a general indication of pressure on

household budgets, around 71% of respondents said they had not refinanced recently, and only 14% signalled their plans to refinance.

“Usually when there is a change in the economic climate borrowers tend to look for ways to ease their cash flow by refinancing their loans, but these results show that average Australians are coping reasonably well,” Norris said.

When asked how they felt about their level of debt, 70% believed it was manageable and that repayments could be comfortably factored into their household budget. “Perhaps attitudes to debt are being cushioned by strong gains in property values, since in the 12 months to March this year, house values rose 27% in Sydney, 21% in Melbourne and almost 11% in Adelaide,” Norris said.

Simon Norris

The survey also found that the majority of respondents had borrowed on a variable interest rate (70%), reflecting broader statistics seen over the past 12 months. “These results show that by and large, average Australians are financially aware and conscious of keeping up with repayments,” Norris said. “These are not high-fliers but prudent individuals who are careful not to overcommit themselves financially, which is a sound approach in the current climate.”

18 www.brokernews.com.au

News

For all the latest mortgage industry news, visit www.brokernews.com.au

Housing recovery to stall

All indications are that the new home building recovery will stall in 2011, according to the Housing Industry Association.

The HIA’s quarterly National Outlook Report highlights a healthy first-stage new home building recovery that will run out of steam by mid-next year.

“It is not too late to turn the situation around through policies targeted at new home building, combined with more rapid progress in reducing structural supply-side barriers,” said HIA chief economist Harley Dale.

“The empirical data, observations on the ground, and the slow progress in reducing

cont. from cover

>>

“It is quite possible to have a broker agreement which provides that trail is only paid while brokers are a member of an aggregator group,” he said.

“It would also be possible for a broker agreement to go further and say that trail is only payable while brokers are credit

supply-side obstacles, all currently point to the first increase in housing starts in eight years in 2010 reverting back to a decline in starts in 2011.”

Housing starts are forecast to increase by 20% in 2010 to a level of 165,940, before falling back by 3% in 2011. On a financial year basis, the number of housing starts is forecast to increase by 22% in 2009/10 and 2% in 2010/11 to reach a level of 162,600. Starts are forecast to be flat in 2011/12.

“Australia needs to build over 190,000 dwellings in 2010 alone to meet underlying

demand and over the next 10 years we need to build 420,000 dwellings more than we built over the last decade,” Dale said.

“A failure to build sufficient homes is placing huge pressure on rental markets and is making it very difficult for younger Australians who aspire to home ownership to achieve that goal.”

Meanwhile the renovations sector is looking healthier, Dale said, with three consecutive quarters of growth seen through to March this year. “The recovery in the renovations sector includes signs of growth in major alterations and additions, which encompasses

structural extensions, an important component of the overall housing industry,” Dale said.

representatives of the aggregator paying the trail. However, these types of restrictions are rare.”

He also added that a broker does not necessarily need to be a credit representative of the aggregator paying the trail to receive it, unless the broker agreement says so. Whether a broker needs to hold a licence or be a credit representative in order to receive

trail also depends on the agreement, added Denovan.

“If the broker has no ongoing duties and is just being paid for introducing the borrower, the broker does not need to be registered, licensed or be a credit representative. However, a broker will need to be registered, licensed or a credit representative if he or she will be providing credit

assistance, or acting as an intermediary in relation to the borrowers for which the trail is being paid,” he said. “It is worth bearing in mind that, even if there is no express provision in the Broker Agreement, there may be an implied term that the broker is expected to act as an intermediary with the customer throughout the loan term.”

Harley Dale

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19

OFF THE CUFF Frank Knez

What was the last book you read?

At The Gates of Darkness by Raymond Feist. I read my first novel by this author in high school and continue to enjoy them and others in this genre.

What’s the most extravagant gift you ever bought yourself?

One that comes to mind is my Jamo speaker system and Sony receiver, which facilitates my efforts to unwind – often to the displeasure of my lovely wife.

If you did not live in Australia, where would you like to live?

It would have to be somewhere in Southern or Western Europe, where the lifestyle is a lot more laidback than the fast-paced Australian lifestyle.

Of the few countries I have visited in that part of the world, there seems to be a greater focus on family and socialising and not so much of a concern about time.

What CD is currently playing in your car stereo?

The CD title is ‘Fever’, which is the latest release from [Welsh metal band] Bullet for my Valentine. I will also be seeing them live later in the year.

If you could sit down to lunch with anyone you like, who would it be?

Probably our Prime Minister, so I could outline my list of grievances on a number of policies I believe can be better managed.

If you could give anyone starting out in business one piece of advice, what would it be?

Do your research and analysis at the outset so that you. are aware of what you are getting into, and be conservative with forecasts and expectations.

Associate director, product & marketing, Resimac

What was the first job you ever had?

My first full-time job was in a collections role in AGC where I worked for three months before accepting a role in head office. A key lesson I learnt was to understand the efforts involved in collecting money on loans in arrears, which should always be a consideration when developing ways to lend money.

What do you do to unwind?

I love to just sit back with music playing in the background – albeit quite loud! I also enjoy going out to dinner with my family and a bottle of good wine; and spending time with my two young children, whether it be in front of the Playstation or playing sport.

If I was not working in the mortgage industry, I would like to be…?

Scoring a goal as the striker for Australia in the FIFA World Cup, and getting paid millions for it!

Where was the last place you went on holiday?

I spent a week in the northern NSW town of Yamba with family and friends. There is very little that beats visiting the many beachside locations off the eastern coast where there is plenty of surf, restaurants, and time to kick back and relax.

20 www.brokernews.com.au

End of financial year

 FY10 is now

behind us so it’s time to dust off your old receipts and make sure you keep your account with the government straight. For answers on how to make tax season less of a hassle, Luke Cornish went straight to the horse’s mouth

Taxing times T

ax time can present even the most enthusiastic of number-crunchers with a pounding headache but, with the right attitude and the right preparation, the ordeal can be manageable.

The key to making tax time as hassle-free as possible is to let someone else do it. If you outsource your bookkeeping, accounting and tax filing, you can probably stop reading right now as you have all your bases covered. However, for those who take a more hands-on approach to dealing with the taxman, keeping a few key points in mind can save you an enormous amount of time – and money.

Preparation

Famed inventor, philosopher and businessman Benjamin Franklin once said: “For every minute spent in organising, an hour is earned.” This maxim is as true today as it was 200 years ago when it was first uttered.

Preparation is the key to keeping your blood pressure down as you work on your tax return.

Before you get to work on filing your taxes make sure you have all the relevant receipts, invoices and records so you can finish in one go, and avoid getting up every five minutes to find another piece of paper.

“If you’ve been doing your bookwork as you go along from a business perspective then come 30 June there shouldn’t be a huge amount of work to do,” says Award Bookkeeping CFO David Patterson. “You need to keep copies of all your invoices to prove deductions. You will then need to keep them for five years once the return is lodged … before you can destroy them.”

The types of records you need can be broken down into two categories – income and deductions. The particular types of records will differ depending on whether you are an employee or whether you are a business owner.

Income

The Australian Taxation Office (ATO) is interested in finding out exactly how much money you brought in during the 12 months ending 30 June 2010. For employees, that generally is covered by the payment summary that is issued by their employer. That can be issued either electronically or by paper and is generally delivered by mid-July.

However, taxable income also includes dividends from stock, rental income and money coming from overseas investments and it is important to make sure that all income is accounted for to avoid problems down the road.

“For business people, we sometimes find that if they’ve got income coming in from foreign sources or trusts or investments, that they’re sometimes left out,” says ATO assistant commissioner Megan Yong.

“If we do a review and find out that they’ve left out some income or over-claimed deductions then we will go through a process of discussion and investigation with the taxpayer. We’ll give them an opportunity to explain the situation and we’ll issue an amended assessment if that’s necessary.”

Yong says that taxpayers can be audited any time in the next five years and that, if an investigation finds that the taxpayer has not been paying their fair share, they can be penalised. “They will probably have to pay some interest on the tax that they should have paid in the first place and they may or may not have to pay a penalty depending on the situation that we find,” she says.

“If they should have known better there’s a general rule that they will be given a penalty.”

Patterson says that by keeping good records throughout the year, you can make sure that your tax files are accurate and complete and avoid the risk of receiving heavy penalties later on.

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“Probably the biggest thing is not having your bookwork up to date,” he says. “Leaving it until the last minute and not having things filed properly makes it really difficult.” Outsourcing your bookkeeping can provide several benefits, Patterson says.

“A person goes into business because they’re good at what they do,” he says. “Getting a bookkeeper largely frees up your time as a businessperson to do what’s going to generate income.”

This is probably unsurprising advice from a man who heads up a franchise bookkeeping company – but if you have a small operation there really are benefits to having someone else crunch numbers for you. Besides, it’s tax deductible.

Deductions

Knowing what expenses you can deduct from your tax liability is vital to getting the biggest refund or keeping your tax bill to a minimum. Generally, any money paid out to further your business interests can be deducted.

Patterson says mortgage brokers should keep a logbook of their car use to determine what portion is used for business and what portion is used for personal purposes. This will determine what percentage of your motor vehicle costs you can claim as a tax deduction. “It can be anything from 100% down,” he says. “Ideally, when you first purchase a car you will keep a logbook for 12 weeks and whatever the portion of travel is for business in that time, you can claim for the entire year based on these figures.”

Patterson says the logbook can be used to determine business usage for five years. Other deductible expenses include mobile and landline telephones, internet, computer costs, electricity, wages, superannuation and work cover. Rental payments for an office are tax deductible and that even applies if you work from home.

“Generally if people are running a business from home there are some rules about having to apportion either their mortgage interest or their rent depending on how much floorspace they are using for the business,” Yong says. “They can generally also claim a portion of their heating and other utility bills depending on their circumstances.”

For example, if you attended the recent Australian Brokers Forum on the Gold Coast you are able to deduct the cost of the event as well as air fares, accommodation and some meals from your tax liability. The same is true of any business seminars or training events that you go to. “All forms of advertising – when it’s advertising the business – is tax deductible so Yellow Pages, White Pages, magazines, even sponsoring local footy clubs or cricket clubs can be treated as tax deductible advertising,” Patterson says.

Depreciating assets

Depreciating assets are any assets that are used for business purposes that you are unable to claim a

21

deduction for. These include motor vehicles, computers and other office equipment such as a photocopier. “[Before filling out your taxes], you will need records of depreciating assets,” Yong says. “This includes computers, recording equipment, cars, and pretty much anything that you can’t claim a direct deduction for – if it has a life of more than one year then you have to depreciate it for tax purposes.”

The ATO will release a booklet on 1 July called “Guide to Depreciating Assets”. It will be available via the Tax Office’s website at www.ato.gov.au. This is also where you can find the most efficient way of filing your taxes.

If they should have known better there’s a general rule that they will be given a penalty.

e-tax

- ATO assistant commissioner Megan Yong

The ATO is encouraging people to move away from the old paper tax returns and start completing all their returns online, with a program called e-tax. This service has a number of benefits including having some of the information filled out for you from information the Taxation Office already has.

“If people lodge their tax return online using a facility called e-tax they can get their payment summary downloaded directly into their e-tax return, provided their employer has provided it electronically to the Taxation Office,” Yong says.

“Tax returns that are lodged online are generally processed within 14 days – and often much faster – so if people are due a refund there is an incentive to use our online facility.”

Getting it right

Yong says that when returns are submitted they are generally processed straight away without being checked at that stage. Then, after the rush, the ATO will target high-risk cases for review.

These can be returns that have a high level of claims or just people who are considered to be very wealthy.

Any inaccuracies can be very harshly punished but Yong says the majority of mistakes on tax returns are simple mistakes.

“People forget to sign their paper tax return,” she says. “If they lodge by paper they need to sign it and if they don’t we send it back.”

“They will sometimes leave out details from particular items or labels on the return and our systems might throw that out and send it back, saying ‘you really need to fill in this or we can’t process it properly’.”

Having your entire paperwork ready and knowing what you are deducting will save you a great deal of time, money and hassle. If you are lodging your taxes yourself you have until 31 October to submit them to the ATO but if you are going through an agent you may have even longer.

Still, it is best to have your return finished and submitted as soon as possible, so the only thing you have to worry about when summer rolls around is working on your tan … and your loan book!

Find out more:

www.ato.gov.au For individual returns call ATO at: 13 28 61 For business returns call ATO at: 13 28 66

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Column

Chris Eade is managing director of lifebroker, an online broker of personal insurance and one of Australia’s biggest sellers of life insurance products. www.lifebroker.com.au

EADE

SOUND PRINCIPLES SHOULD UNDERPIN LIFE INSURANCE REFERRALS How should mortgage brokers approach the issue of selling personal insurance to their clients without losing their trust?

There has been some debate recently within these pages about the pros and cons of the different methods for selling personal insurance to mortgagees, including life, income protection, trauma and TPD insurance. The debate has been sparked by an increase in business in this area, as a growing number of mortgage brokers refer clients to insurance providers.

The debate is well worth having as mortgage brokers and their clients have a lot to lose if the sales process is not of a high quality. It is also worth talking about as poor insurance sales experiences are harmful to consumers.

They can mean the loss of a home if the policy contains exclusions they were unaware of, or tens of thousands of dollars wasted due to overly expensive premiums.

Clients also often cancel policies if premiums are too expensive, leaving them uninsured.

As members of the mortgage and insurance broking industries we rely heavily on referrals for business and maintaining our reputations is critical. Consumers whose interests are not served well will have no hesitation in judging us harshly. Displeased clients lose us goodwill individually, but can give the entire broking industry – mortgage and insurance – a bad name.

Referrals that are in your clients’ best interests will benefit our businesses, as happy clients are more likely to refer friends, colleagues and family. This is supported by a recent survey of 1,000 consumers commissioned by Lifebroker, which indicated that trust is one of the most important factors for clients when they consider where to purchase financial products.

What then, is the best way to sell personal insurance to clients that ensures the sale is in the clients’ – and therefore our – best interests? My first recommendation is for mortgage brokers to start the process by introducing the concept of personal insurance to the client, before

referring them on. This significantly increases the probability clients will take up the referral offer.

Introducing the concept need only include outlining the most common insurance products, such as life, income, trauma and TPD, and explaining their benefits. Plain English insurance brochures or ‘how to’ documents that clients can take away with them are also helpful.

My second recommendation is to refer clients to insurance providers that will spend time educating them on the details of each insurance policy. Education means providing full and accurate information about the most common insurance products, what they cover, how they work, and what they cost, and being available to answer any questions and clarify misinterpretations.

This education ensures clients buy both the right type of insurance and the right level of insurance. It also increases the probability the client will take out an insurance policy.

Only 21% of Australians have income protection insurance and 49% have life insurance, compared to 80–90% uptake for home and car insurance.

Education also overcomes the misinformation and misunderstandings that stop people from insuring themselves, and increases the probability they’ll keep a policy over the long term as they are more likely to understand its value.

My final recommendation is to refer clients to insurance providers that compare insurance products for clients, including comparing features and premiums. Comparing products is an approach already used by mortgage brokers to sell mortgages, so it makes sense to refer clients to insurance providers that use the same model.

The reason for comparing is simple: different people have unique needs that each product provider services differently. Many consumers will find, for example, that premiums for life insurance can vary by up to 50% between different insurers, as each insurer assesses risks differently. Comparing products ensures clients get as much insurance as their budget can afford, making their purchase more sustainable.

These three principles should form the basis for any sale of personal insurance to mortgagees. By following these principles you’ll not only look after your clients, you’ll find that they’ll look after you.

Education means providing full and accurate information about the most common insurance products

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23

INDUSTRY NEWS IN BRIEF AFM cuts fixed rates

Australian First Mortgage (AFM) has joined other lenders in reducing its fixed rate mortgage offer, announcing that the two-year and three-year fixed rates applicable to its AFM Advantedge loans have been reduced. The two-year fixed rate has been cut by 0.21%, resulting in a rate of 7.22%, with the three-year rate falling by 0.3%, meaning a rate of 7.48%.

Both cuts are effective immediately. AFM national director of sales and marketing Iain Forbes argued that the new cut rates are lower than the fixed rates offered by some of the banks. AFM is also offering these fixed rates with locked pricing and no rate lock fees – although it stresses that this is for a “limited time only”. Additionally, the AFM Advantedge product waives the application fee, as well as up to $220 of the valuation fee.

Stress tests get tougher

Rate rise stress tests applied by lenders have nearly doubled in size over the last few months, according to new research.

The stress testing levels now hover around 1.5%-2.5%, up from 0.75%-1.5% last year. Based on the average mortgage this could mean that a borrower may have to show they could pay up to as much as $800 a month extra. The research, conducted by Mortgage Choice, also found some lenders had cut the proportion of overtime earnings they will take into consideration when assessing ability to repay, from 100% to 50%. None of the five major lenders would be drawn on their stress testing levels, although a Westpac spokesperson said that “buffers do vary from time to time reflecting economic conditions, but our approach is at the tighter end of the market”.

US mortgage rates hit record low

Borrowers in the US are able to secure a 30-year fixed mortgage for just 4.69% after interest rates hit a record low. The previous record was set in December when borrowers could get a 30-year fixed mortgage for 4.71%.

The US central bank said that the current difficulties facing Europe would mean that the country’s benchmark rate would remain at its emergency setting of between 0-0.25%.

“Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad,” the Federal Reserve said. Federal Reserve chairman Ben Bernanke slashed rates to historic lows at the end of 2008 in an attempt to combat the financial crisis. However, with rates still remaining at emergency settings, there are questions as to how effective it has been.

Moody’s warns banks on funding costs

Broker berates Beckham

Australian banks are likely to bear the brunt of the fallout of the European debt crisis, a Moody’s executive has said, resulting in higher funding costs that will likely be passed on to borrowers. Senior vice president Deborah Schuler told a conference in Singapore that Australian banks will be impacted more than their Asian counterparts because of the former’s reliance on offshore funding to fund balance sheets. “While the vast majority of Asian banks are funded by domestic deposits, banks in Australia, New Zealand, and Korea rely on the cross border debt markets to fund a portion of their loans,” Schuler said. Australian banks cited higher funding costs as the reason for increasing the margin between their variable rate mortgages and the RBA’s official cash rate. There is speculation that any pressure on funding costs could result in that gap widening even further.

A London-based mortgage broker has been charged by South African police and fined after eluding security and confronting England players and coaching staff in the team’s changing room, after a disappointing 0-0 draw with Algeria at the World Cup. Pavlos Joseph told media that he was looking for a toilet when a security guard sent him in the direction of the players’ tunnel. Joseph then found himself face-to-face with soccer legend David Beckham and the broker took the opportunity to give him a piece of his mind.

“I looked David straight in the eye and said, ‘David, we’ve spent a lot of money getting here. This is a disgrace. What are you going to do about it?’” Joseph said. Beckham’s response was simply to ask the intruder who he was and what he was doing there. Joseph said he then confronted the England players who were sitting on benches telling them their performance was woeful.

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Feature

Shane Oliver

Are we set for a double dip?  A MP chief

economist Shane Oliver looks at the stock market and leading indicators to see if the economy is heading for a double dip recession

S

ince April it seems the worry list for investors has expanded dramatically.

Concerns about Europe, a hard landing in China, tougher bank regulations, a US housing sector relapse, tensions in Korea, the Middle East and Thailand, the oil spill in the Gulf of Mexico and the proposed Australian resources tax are all weighing on investors.

Signs the global recovery may soon pass through its fastest phase and is losing momentum have also led to concerns that we will soon see the dreaded “double dip” in global economic activity. But how worrying is the emerging loss of momentum in global growth – and what does it mean?

Leading indicators losing momentum

Signs of a possible top are evident in a range of leading economic indicators: • The three-month rate of change in the OECD’s leading indicators of economic activity for both OECD countries and for Brazil, Russia, India and China appear to have peaked • Business conditions indicators in the US, Europe, Japan and China are showing signs of topping • Even in Australia our leading indicator has rolled over reflecting, in part, weakness in business and consumer confidence and falls in building approvals Signs of a topping in growth momentum have arguably added to market jitters over the last two months.

Hard versus soft landing?

However, what matters is not the peak in growth momentum, but whether the world settles into more sustainable growth or slides back into recession. While growth indicators may be losing some momentum, this is not necessarily a major concern.

First, some loss of momentum was inevitable. Most growth indicators had reached extreme highs and if they continued to accelerate it would have been consistent with a boom/bust scenario.

Rather, it is perfectly normal for growth to bounce strongly coming out of a recession or steep downturn, as stimulus measures take hold and production is ramped up to meet better-than-expected demand, and to then settle down into a pace more consistent with steady expansion.

This is particularly the case in China where growth became too strong early this year, prompting authorities

to move towards slowing it down. This is now happening, suggesting the measures to bring the Chinese economy back under control are working and further aggressive tightening is unlikely. In turn this adds to confidence that China’s growth will settle around 9–10%, rather than have the hard landing that many fear.

Some moderation was also desirable in Australia.

Moreover, some of the recent fallback in leading indicators for Australia is owed to uncertainty generated by the proposed resources tax.

However, with interest rates likely to stay on hold for a while around long-term average levels, compromise over the resources tax looking likely and tax cuts and employment growth boosting household income, the growth outlook in Australia is likely to remain reasonable.

Second, fears of a double dip back into recession are common after all major recessions but the reality is that double dips are unusual. If a double dip is defined as a fallback into recession within two years, then the only US double dip in the last 85 years was in the early 1980s. The dip back into recession or depression in the late 1930s in the US doesn’t really count, as it followed several years of growth in 1934–36.

Third, the biggest threat is premature policy tightening. This, via then-US Federal Reserve chairman Paul Volcker’s move to squeeze out inflation, is what drove the US back into recession in 1982 after a brief recovery in 1981. There is certainly a very high risk of this in Europe with Europe-wide fiscal tightening set to knock 1 to 1.5 percentage points off growth over the next few years. Against this though, Germany is holding up well, helped by a lower euro.

In addition, the euro-zone economies have contributed very little to global growth anyway over the last several years. The US economy is muddling along reasonably well, helped by a stronger jobs market with absolutely no sign of premature tightening by either the Federal Reserve or the US Government. Japan, Asia and Brazil are all surprising on the upside.

Market jitters

Growth cycle transitions usually result in tougher periods for growth assets like shares and commodities.

A good example was seen in 2004 when, after a strong rally from the tech-wreck lows seen in March 2003 to early 2004, major share markets had six to nine months

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of weakness as momentum in global leading economic indicators peaked and China and the US moved towards tightening. In fact, Asia (ex-Japan) shares had a 20% correction in April–May 2004 on worries that global monetary tightening would be negative for emerging markets.

Similarly, the move to higher US interest rates and concerns about the outlook for growth in Asia on the back of Chinese tightening triggered a correction in metal prices and the Australian dollar into May–June 2004. Despite US and Chinese monetary tightening causing corrections in growth-oriented investment markets that year, the broad trend in global shares, Asian shares, commodities, resources stocks and the Australian dollar remained up. Global and Chinese economic growth remained solid and fears of a hard landing dissipated.

So far, financial markets this year seem to be tracing out something like the 2004 experience – albeit with a bit more volatility reflecting greater-than-normal investor sensitivity this time around, given the wellknown issues with high public and private debt levels in developed countries. More broadly, it’s often the case that the second 12 months after a bear market ends will see more constrained and volatile gains in shares.

As shown in the table to the right, the average gain in Australian shares in the first 12 months after a bear market ends is 28%, whereas the average gain in the second 12 months is just 6%.

Similarly, the average gain in US shares in the first 12 months after a bear market ends is 39%, followed by an average gain of just 8% in the second 12 months.

This reflects a combination of factors, including the bear market undervaluation being removed by the initial

25

rally in shares, the shift in growth leading indicators from acceleration, to more sustainable expansion and the unwinding of stimulus.

Conclusion

After strong returns for the first 12 months out of last year’s bear market lows it’s certainly become a lot tougher, but provided we are right and global economic growth doesn’t lurch back into recession, then the rising trend in shares will resume supported by solid earnings growth, attractive share market valuations and low global interest rates. Recent share market action suggests that shares have built a base after their April-May correction and are now starting to move higher again.

The second 12 months is normally tougher for shares US shares bear market lows Jun 49 Oct 57 Jun 62 Oct 66 May 70 Oct 74 Aug 82 Oct 02 Average Mar 09

US, % gain in US, % gain in Australian Aust, % gain Aust, % gain first 12 mths second 12 shares - bear in first 12 in second 12 from low mths after low market lows mths from low mths after low 42 4 Dec 52 8 13 31 10 Nov 60 12 -2 33 -2 Jun 65 8 11 33 7 Nov 71 49 -25 44 11 Oct 74 54 16 38 21 Nov 76 6 21 58 2 Jul 82 39 9 34 8 Nov 87 35 5 39 8 Jan 91 39 -9 69 ?

Feb 95 25 8 Mar 03 28 24 Average

28

6

Mar 09

53

?

Data covers post-war period. Source: Bloomberg, AMP Capital Investors

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Column

Dr Tony Hayek is the CEO of Blue Wealth Property. His company works with Mortgage Brokers, supporting their clients to invest in property.

HAYEK

PROPERLY DEVELOPED

Picking up on property growth trends requires empirical data, good research and watching the state of the market closely Throughout their lifetime most Australians will build the majority of their wealth through residential property. Yet despite Australian’s obvious love of property, the financial planning and wealth creation sectors have historically ignored direct residential property as an asset class. A key reason for this was the glaring absence of empirical research on property and property markets.

Research is key to making any sound investment decision and the need for clear research in the real estate sector is growing. Good research helps identify growth markets, the most suitable type of property in that market, reduce overall risk and increase the potential for strong cash flow.

I am often asked to identify the next ‘top 10 growth’ suburbs or the next property ‘hot spots’. To be frank, this whole business of trying to make short-term predictions just does not work. What it does do is steer us away from what we are actually trying to achieve: healthy and stable returns over the medium to long term, whilst maintaining an acceptable level of risk. Blue Wealth has spent years developing a model that ensures our clients make wellinformed investment decisions. Our research has clearly shown that the Australian property market has historically been driven by four key factors: • Employment and economic growth • Population and demographic changes • Infrastructure and government spending • Supply and demand Over the years empirical research conducted by Blue Wealth has been able to help clients identify growth markets before they boom as a result of focus on the above mentioned drivers. Since 2004, the main markets that our clients have been investing in include Perth, Brisbane, Darwin and Sydney. .

Perth: a bustling economy Traditionally lagging behind its east coast counterparts, Perth’s unprecedented property surge from 2003-2006 was the product of robust economic and employment growth. In December 2003 the median property price was $236,000.

Three years on, the median price grew to $450,000, in stark contrast to Sydney’s 1.08%, Brisbane’s 6.09% and Darwin’s 12.80% rate increases in the same period.

Investors that bought three and four-bedroom properties in the suburbs in and around Perth did exceptionally well. Most of these properties doubled over a 36-month period. While Perth was predominantly a house and land market, investors found the highest returns were generated from units in the upmarket, inner-city suburb of Subiaco. South of the river at Canning Vale also outperformed most other parts of Perth’s market, which we expect to see growth restart in 12 months.

Brisbane: multiple factors driving growth Prices in Brisbane have had a longer run than in other cities, with the market seeing a fundamental shift into a long-term growth phase. Unlike other markets in Australia, Brisbane has a number of drivers that are forcing prices up. It grew quickly as a result of unprecedented interstate migration, a buoyant economy, a number of large infrastructure projects and an undervalued property market. The construction industry has recovered after the GFC, however the massive shock the industry took during 2008 meant housing supply came to a halt while the population was still growing. This has caused a shortage in the level of housing stock in Brisbane.

The median sales price spiked from 2001–2003 with annual growth rates of 15.46%, 18.92% and 42.79% in this three year period. Prices were also strong in 2007 with growth of 20.77%. Investors who flocked to Brisbane’s inner-city suburbs have achieved significant returns. Brisbane’s market has experienced strong growth over the last few years, so investors need to be selective about where they invest now.

Darwin: infrastructure project kickstarting growth Darwin property has had an amazing run over the past five years. Large infrastructure projects, employment growth and housing affordability (now deteriorated significantly) have all contributed to a massive population influx since 2005. This has been responsible for driving house prices up: growth was quite phenomenal between 2004 and 2008 with the median house price in Darwin growing from $230,000 to $432,000 or up by 88% during the period.

The Darwin CBD and water-surrounding suburbs including Cullen Bay have remained strong in 2010, with property investors still achieving exceptionally good results.

Apartments with water views purchased in the mid$400,000 price range are now worth more than $700,000.

With infrastructure and population movement still strong, this reflects ongoing growth for the ‘top end’s’ capital.

Moving forward, investors need to exercise caution as it does appear as though this market is overheating.

Sydney: supply and demand imbalances Sydney prices stabilised between 2004 and 2009 after the boom of the early 2000s. Prices have started to creep up again, and our research shows that we can expect this to continue over the next 24 months.

Housing completions are currently close to record lows and net population growth in Sydney is larger than in any other capital city, which has created significant pressure on housing markets. This is already evident in the rental market, with rents for all types of dwellings growing by greater than 20% in the last three years.

Research is key to making any sound investment decision and the need for clear research in the real estate sector is growing

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Finalists announced in MPA 10.9 September 24, 2010 The Westin Hotel, Sydney

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Caught on camera From the mean streets of Sydney to the darkness of Sherwood Forest, brokers had their hands full with events this month. WBP Property brought industry leaders together, hosting a breakfast to take a look at the Sydney property market, while Deposit Power treated brokers to a premiere screening of the new Robin Hood movie Photography by Simon Kerslake

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WBP PROPERTY BREAKFAST PHOTO 1: Greville Pabst (WBP), Chris Lackey (WBP), Justin Smirk (St.George) PHOTO 2: Nigel Napoli (Savills) and Jonathon McKenzie (Savills) PHOTO 3: Amanda Ellery (Genworth Financial) and Shelley Horton (Genworth Financial) PHOTO 4: Adam Buttsworth (HSBC) and Rob Simpson (Simpson 7 Associates) PHOTO 5: Adam Thomson (Nexus Estate Agents) and Geri Forsaith (Sydney Property Conveyancing) PHOTO 6: Peter Coueton (Savills) and Simon Napoli (Edge Property) PHOTO 7: Kelly Moore (NAB) and Claire Steenson (WBP) PHOTO 8: John Symond (Aussie Home Loans) PHOTO 9: Greville Pabst (WBP) PHOTO 10: Louisa Parsons (WBP) and Rajan Khatak (MPA Magazine)

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DEPOSIT POWER MOVIE SCREENING PHOTO A: Ramon Mitchell (Property Buyer), Matt Corbett (Property Buyer), Jamie Zimmermann (Property Buyer), and David McElveney (Property Buyer) PHOTO B: Michael O’Connor (IMB), Daryl Crooks (PLAN Australia), Martin Tarrant (IMB) PHOTO C: David Taylor (Deposit Power), Keith Levy (Deposit Power) PHOTO D: Andrew Morello (Yellow Brick Road), Ivana Veronika (Ivy Hair) PHOTO E: Selen Ertan, Sam Hooper (Yellow Brick Road) PHOTO F: Sue Taylor (barista), Lyn Chng (Lyn’s Cake Art), Michelle Cottam (computer engineer)

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Feature

Simon Norris

One year on What a difference a year makes... or not. Australian Broker reflects on the top stories from this time last year and finds out whether things have changed

Issue: Australian Broker issue 6.13 Headline: “Planners abandon commissions – will brokers follow?” (page 10) What we reported: Arguments about brokers using a fee-forservice model gained momentum following the news that the financial planning industry were abandoning commission payments altogether.

Readers on Broker News hotly debated the issue on a number of blogs, with arguments both for and against – some argued that trail commissions were “designed as an ongoing service payment so brokers can manage their businesses and assist clients” while others said very few brokers looked after clients postsettlement. Others doubted whether borrowers would be willing to pay brokers a fee for arranging a mortgage, with a reader writing: “Ask anyone if they will pay $1,500 or $2,000 to a broker to find the right loan for them and you will find that the majority of people won’t be able to afford it and will therefore go directly to the banks/lenders.”

But some saw no other way: “This industry is going down the road of financial planning where in a short amount of time there will be no commission paid by the funders.” Peter White, president of the FBAA, was certain that fee-for-service would be a feature of the industry in the future and said it was something he felt “strongly about”. He warned that there were “traps to be cautious of” and that it was “not yet cut and dried as to how feefor-service will look”. White added that there was space in the industry for both commissions and fee-for-service.

What has happened since?

Debate continues to flow over the pros and cons of the various models, and White thinks it’s still too early to tell whether fee-for-service

would find favour with brokers – although he is still open to the model’s benefits. “From a commercial viewpoint, fee-for-service would make sense – as long as the fees are fair and reasonable, carried out in the right way, and properly documented,” he said.

In fact, White believes a fee-for-service model could be more transparent than the commission model – and that the biggest hindrance would be getting lenders onside.

Headline: “MFAA proposes laying stamp duty to rest” (page 14) What we reported: The MFAA said it would back a recommendation in the Henry Review to abolish stamp duty. “Stamp duty on home loans is a tax that doesn’t serve a useful purpose to the economy; it is an inefficient and unproductive cost that discourages home ownership and home transfers of ownership,” said MFAA president Phil Naylor.

The wide-ranging tax review by Treasury Secretary Ken Henry was reportedly considering proposals to remove the stamp duty charged by state governments on housing loans. Tax experts were reported to have told the Henry Review that home loan stamp duty acts as a barrier to moving house and creates inefficiencies in the wider economy by, for example, discouraging labour mobility.

“Removing the stamp duty on home loans is a simple measure that would boost activity in the housing and lending market and help drive the economy forward,” Naylor said.

What has happened since?

The Henry Review’s final report came out in favour of abolishing stamp duty, ideally replacing it with a reformed land tax. The federal government has opted not to take a view on the recommendation, saying that the relationship between stamp duty and land tax is an issue for individual states and territories. However, it has ruled out the idea of introducing land tax on family homes completely. MFAA CEO Phil Naylor, meanwhile, has reiterated that the MFAA is “still and always is in favour of the abolition of stamp duty on mortgages”.

Headline: “Nothing silly about IDR proposal – FBAA” (page 15)

Peter White FBAA

What we reported: The FBAA hit back at suggestions by the MFAA that proposals regarding internal dispute resolutions (IDR) requirements for brokers contained in the draft National

Phil Naylor, MFAA

Consumer Credit Protection Bill were “silly” and not practical for one-man brokers and small firms. On the day the draft package was introduced into the Lower House of Parliament, Peter White, national president of the FBAA said he believed the IDR requirements were “appropriate to both one-man broker businesses and small broking firms”. White said FBAA members had included IDR procedures in their practices since its inception and they worked fined, “so long as they’re run in the right format”. “For anyone to say it is silly – they don’t have the right,” White said, responding directly to comments made by MFAA CEO Phil Naylor that IDR requirement is “a bit of a nonsense if you are a one-man broker”.

What has happened since?

The National Consumer Credit Protection Bill became the National Consumer Credit Protection Act 2009, with the clauses relating to IDR intact. ASIC, the body charged with overseeing the legislation, has also published guidance setting out the requirements for IDR procedures. In terms of the arrangements for small brokers, the MFAA has been lobbying ASIC on this matter, with Naylor saying it was successful. “ASIC has now accepted that small brokers do not have to comply with the previously rigid arrangements that the person receiving the complaint must be different to the person who is being complained about.”

FBAA president Peter White is also pleased with the way the final requirements have turned out – and added that most oneman brokers are likely to find few problems complying with the regulations. “Your typical one-man band will find that he or she is already complying with 80% of the requirements; meanwhile, your large outfits are likely to have a dedicated compliance department to deal with this. The people that may face problems are those that have, say, five or six people working for them. That’s a part of the market in which we may see some consolidation in coming months.”

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Services

Receive breaking news updates direct to your inbox. Sign-up for the FREE e-newsletter at www.brokernews.com.au AGGREGATOR / WHOLESALE BROKER LoanKit 1800 466 085 www.loankit.com.au page 19

MAS Funder 02 9283 7566 www.masonline.com.au info@masonline.com.au page 15

PLAN Australia 1300 78 78 14 www.planaustralia.com.au mail@planaustralia.com.au page 5

MKM Capital 1300 762 151 www.mkmcapital.com.au page 8 MORTGAGE MANAGER / NON-BANK Mango Media 02 9555 7073 www.mangomedia.com.au page 1

Vow Financial Pty Ltd 1300 730 050 www.vow.com.au page 18 COMMERCIAL Banksia Financial Group 1800 333 114 www.banksiagroup.com.au page 9

Royal Guardian Home Loans 133 455 www.royalguardian.com.au info@royalguardian.com.au Vault Mortgage Corporation 1300 798 697 www.vaultmortgage.com.au page 21

EQUIPMENT/VEHICLE LEASING Macquarie Leasing Pty Ltd 1800 005 046 introducer@macquarie.com page 14

NON-BANK LENDER Hemisphere Financial Services 1300 793 742 www.hemispherefs.com.au page 17

INSURANCE ALI Group 1800 006 776 www.aligroup.com.au service@aligroup.com.au page 7

Mortgage Ezy 1800 TOO EZY (866 399) www.mezy.com.au ezyquit@mezy.com.au page 32

LENDER Club Financial Services 1300 557 600 www.clubfs.com.au loans@clubfs.com.au page 4 Homeloans Ltd 1300 787 866 www.homeloans.com.au page 31

NON-CONFORMING Pepper Homeloans 1800 737 737 www.pepperonline.com.au page 13

www.residex.com.au The House Price Information People

Liberty Financial 13 11 80 www.liberty.com.au page 3

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RP Data www.rpdata.com page 23 Trailerhomes 0417 392 132 page 26 SHORT TERM LENDER Crown & Gleeson 1800 735 626 www.crownandgleeson.com.au page 2 Interim Finance 02 9971 6650 www.interimfinance.com.au page 6 NCF Financial Services Pty Ltd 1300 550 707 www.ncf1.com.au page 10 Rapid Capital 07 5562 2485 www.rapidcapital.com.au page 16 SOFTWARE / IT Stargate Group 1300 723 613 www.stargategroup.com.au Symmetrycrm@stargategroup.com.au page 11 WHOLESALE Resimac 1300 764 447 www.resimac.com.au newbusiness@resimac.com.au

OTHER SERVICES Residex 1300 139 775 www.residex.com.au page 25

To advertise in Australian Broker, Call Simon Kerslake on +61 2 8437 4786