Issue
06
2017
ADDING NEW REVENUE STREAMS TO YOUR BUSINESS Working together to create tomorrow's advisers today
DIGITAL:
OPPORTUNITY OR THREAT?
4 MARKETING TRENDS TO MASTER
ADVISER PROFILE
BLACK IS BACK
CONTENTS ADDING NEW REVENUE STREAMS TO YOUR BUSINESS UP FRONT /// 04 EDITORIAL
After some big changes in 2017 Philip Macalister highlights the two trends you need to think about to be prepared for 2018.
06 OPINION
John Bolton shares why relationships and quality advice will be more important than ever in the future.
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LEAD STORY As the housing market slows in many parts of the country, John Bolton discusses how to add additional revenue streams to retain customers and futureproof your business.
FEATURES /// 14 PROPERTY NEWS
The new goverment has wasted no time turning election promises to ambitious plans with implications for landlords.
16 HOUSING COMMENTARY Spring warms up house prices in most of the country while changes to LVR and housing standards spell changes for landlords.
18 REGULATION CHANGES
What you need to do to get your advisory business ready for new financial advice regulation.
24 ANZ INVESTOR SURVEY 08 NEWS We share the latest digital advances and find out why ANZ has put the kibosh on repayment holidays.
12 PEOPLE BNZ’s next managing director, ANZ’s new chief economist and who’s back from the UK to join Mortgage Express?
COLUMNS /// 26 SALES AND MARKETING Paul Watkins shares why speed is key for good customer service in the age of now and how easy it is to harness it.
28 INSURANCE
Steve Wright raises some factors to consider to ensure your clients aren’t tripped up by level premiums.
32 LEGAL
With change afoot, Jonathan Flaws finds out whether looking back can help us to see forward.
Despite concerns, investors are as committed to property as an asset class as ever.
30 MY BUSINESS
Why Julia Clark from Black Label Mortgages is feeling so confident.
34 INTELLIGENCE
A breakdown of some of the big banks’ loan books.
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PUBLISHER'S LETTER
There is no new normal TMM Publisher Philip Macalister reflects on the year and what we have learnt.
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ith the year coming to an end, I thought it would be useful to reflect on the past 12 months, but more importantly make an attempt at putting things into perspective. There is little doubt, in my mind anyway, that 2016 was one of the most disruptive in mortgage advice that I remember. It’s nice to reflect that the past 12 months have been far smoother, although those “temporary” dreaded Reserve Bank lending restrictions are still in place. Describing 2017 as BAU – business as usual – is arguably a stretch. Rather it seems the world has changed, and a rub of the crystal ball would suggest there is more change coming. There is no such thing as “the new normal”. When I look back over the year I see two growing trends. One I have talked about often. Regulation. It’s coming, embrace it. Sitting back and saying, “let’s wait until the Bill is passed” just isn’t an acceptable option. Yes, there are many moving parts and it is a jigsaw, or maybe a Rubik’s cube is a better description. You know you will have to be licensed to continue in business in 2019 so it is not too early to start thinking about how you
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will become licensed. Another theme surfacing with remarkable regularity now is digital disruption. I know this is a bit of a cliché which sometimes is hard to put into everyday perspective. Here’s an idea about how to think about it. It’s the driverless car. Again there is heaps of press around this technology and it is getting closer and closer. But we can get our head around how technology can disrupt an everyday function. When I talked to bank bosses recently they all talked digital. This isn’t new, former Co-operative Bank CEO Bruce McLachlan talked about this in an earlier issue of TMM this year. When I read between the lines of what bank bosses are saying it is nearly a one-digit salute to advisers. They are so focused on owning distribution that third-party barely warrants attention. This is absolutely perplexing when ANZ originates around 40% of home loans via advisers and BNZ says its market share position was only saved by advisers. Earlier this year the PAA ended its distribution agreement with TMM. We are pleased to report that Geoff Bawden's Q Advisor Group has stepped in to ensure TMM gets to New Zealand's mortgage advisers. It's a great sign of support for both TMM and advisers. Across the Tasman ANZ chief executive Shayne Elliott expects advisers will move from writing just over 50% of loans to 80%. “We love brokers,” he was quoted as saying. How I would rejoice if New Zealand bank bosses said the same thing on this side of the Tasman.
Philip Macalister Publisher
PUBLISHER: Philip Macalister SENIOR WRITERS: Miriam Bell, Joanna Mathers, Susan Edmunds CONTRIBUTORS: Paul Watkins Steve Wright Jonathan Flaws John Bolton GRAPHIC DESIGN: Jonathan Harding ADVERTISING SALES: Freephone: 0800 345 675 Kelly Thorpe Phone 0274 202 038 kelly@tarawera.co.nz SUBSCRIPTIONS: Dianne Gordon Phone 0800 345 675 dianne@tarawera.co.nz HEAD OFFICE: 1448A Hinemoa St, Rotorua PO Box 2011, Rotorua Phone: 07-349 1920 Fax: 07-349 1926 editor@tarawera.co.nz
The NZ Mortgage Mag is published by Tarawera Publishing Ltd (TPL) TPL also publishes online money management magazine Good Returns www.goodreturns.co.nz and ASSET magazine. All contents of The NZ Mortgage Mag are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited.
The NZ Mortgage Mag welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in The NZ Mortgage Mag, or on other issues, please send your comments to: philip@tarawera.co.nz
OPINION
The future of mortgage advice In an increasingly digital world quality advice and relationships will matter more than ever, writes John Bolton.
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e’re in a world of unprecedented change. On the one hand, we are facing increasing levels of regulation here in New Zealand and a new regime for advisers. Over the past six months we have felt the tightening of credit policy by Australian-owned banks influenced by the Australian regulators. More recently there has been the ASIC review of Broker Commissions and the Australian Banker’s Association (“Sedgwick Report”) into bank and third party sales practices. Both are still a focal point for advisers in Australia and that could have downstream implications here. As a profession, we need to lift our influence and be more engaged with stakeholders including our counterparts in Australia. Sitting around waiting for change to happen to us is not an option. Change is everywhere. Like us, lenders are facing rapidly changing and disruptive technology. There is over USD$10 billion a year flowing in Fintech globally. The scope of what is changing and the pace of that change is accelerating. At times, it can feel scary! Fintech will continue to get talked up and there will be winners and losers and plenty of false starts. As mortgage advisers, my security blanket is that we are a relationship business. An MFAA study in Australia shows that 50% of clients come as referrals from friends, family and other advisers. The study also showed that only 30% of our clients would consider doing their next transaction completely online. From my perspective, personalised advice and relationships will remain critical for most consumers. We can and should embrace automation, but don’t underestimate the value of advice. Buying a house is complex, emotional and often one of the biggest financial decisions our clients make. I think advice and building relationships will become the differentiator. Transactional brokering (aka clipping the ticket) will lose out to technology and the products and price will be commoditised.
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❝ Sitting around waiting for change to happen to us is not an option.❞ -John Bolton In Australia, the mortgage adviser industry is now 54% of origination and increasing. We don’t have accurate numbers in New Zealand yet, but I reckon we are about 35% market share. So, there’s plenty of upside. Interestingly, I think technology will disrupt banks more as they look to automation and struggle to deliver bespoke advice. The future is in our hands but we need to shape it and some of that won’t be easy. An obvious place for us to start is in lifting our standards. Now, almost anyone can be a mortgage adviser after a few days of training and be largely unsupervised. We all know that’s wrong! The standards we set will determine how we are judged by the public and other advisers, and by stakeholders like regulators and our lenders. It’s just part of what we need to fix to get ready for the future John Bolton is the mortgage practitioner director at Financial Advice New Zealand.
TMMONLINE.NZ / NEWS
DIGITAL THREAT TO MORTGAGE ADVISERS
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ll three banks which have reported results recently have highlighted their push into digital tools to grow their businesses. This provides a threat
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and an opportunity to mortgage advisers. BNZ is clearly wanting to develop digital tools to service customers and keep them within its own channels, rather than through
third parties. “The more things get digitised, the more we can deepen our relationships with our customers and continue to strengthen our proprietary channels, and proprietary relationships with our customers," out-going chief executive Anthony Healy says. It is a threat to mortgage advisers, he concedes, but “the brokers can digitise, too.” Over at Westpac, chief executive David McLean says: “There’s a certain segment of the market where the brokers really do provide great service to the customer, but we’re not necessarily aiming to grow it.” McLean says the digital tools will “have some effect (on distribution), "but I think it will have an effect on ordinary, vanilla transactions far more.” “The everyday stuff you do with the bank will become completely digital, if it’s not already. People will want to do those normal transactions when it suits them, 24/7, on their mobile phone. “When it comes to a complicated decision – i.e. “How do I start thinking about how I save for my retirement?” or “How do you go about buying a first home?” – those sorts of questions will lead people to want to talk to an expert human being, at least in our lifetime.”
LARGE MORTGAGE AND INSURANCE ADVISER GROUP CHANGES HANDS
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ne of Auckland’s largest mortgage and insurance advice groups, Mortgage People, has changed ownership. The Ponsonby-based business has been bought by a partnership which includes one of the group’s advisers, Katrina Church, and Simon Fisher and Greg Barratt. Fisher was formerly the sales manager at Partners Life and left last year to head up insurance adviser group Preferred NZ. Barratt is head of distribution and sales at Preferred. Fisher said his and Barratt’s involvement in this purchase was in their own name, not as part of the Preferred NZ group. Mortgage People and its associated company, Insurance People, was previously
owned by Carey Brunel and Glenn Christie. Avanti’s Glen Hawkins also owned a stake in the business. In its heyday it was writing around $1 billion in home loans each year, however, that is down to around $300 million. More focus had gone into the life insurance side of the business since then and that had grown to a substantial operation, run by Church. Fisher says the business has “good bones and structure,” as new owners they would “refocus on what the business was doing.” One of the attractions of the business is that it had successfully managed to do mortgages, life insurance and fire and general. Fisher says many firms try to do this but fail.
BNZ FIRST BANK TO MARKET WITH ONLINE LODGEMENT TOOL
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NZ is set to launch an electronic lodgement process to help advisers and improve turnaround times on loan applications. The bank has started training Mortgage Express advisers and plans to work with NZFSG early next year. BNZ head of third-party distribution Adam Ward says he expects the process to improve turnaround times by 50%. While it won’t be compulsory for advisers to use the platform, there will be a stage when it gets to critical mass that all apps will have to be done through the platform. “I would love to see it happen next year,” he says. However, he also says BNZ would be “practical and logical” around this stage and it “won’t be dogmatic”. TMM understands some advisers, including a number of big writers, don’t use a CRM. Ward said these people could make lodgements directly into the bank’s app, but, in his view, it was clear that all mortgage advisers should be using CRMs.
Adam Ward “It’s not acceptable” not to use a CRM, especially as the regulatory requirements around advice is ramped up, he says.
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GROUPS WORKING TOGETHER
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ortgage Express (MX) and the Q Advisor Group, while separate, are working together to develop tools to empower their advisers. They have developed and launched an end-to-end mortgage business platform complete with templates which have been signed off as being compliant. This platform will be extended to include life insurance. The groups are also working to ensure their advisers comply with existing and proposed requirements, and are also working to ensure websites and pointof-sale marketing material will meet the rigours of current and future regulation.
MX and Q, while separate entities, understand the value that aligning themselves and working strategically together provides both for them and for advisers. Head of MX, Sarah Johnston, and Head of Q, Geoff Bawden say there is no commercial threat when parties trust each other and understand the benefits that working together provides for the common good of their members. Working together saves cost and more importantly enables both groups to provide a better outcome for their members at a competitive price Bawden and Johnston say.
Geoff Bawden
ANZ: NO MORE REPAYMENT HOLIDAYS
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NZ is axing loan repayment holidays, prompting questions about whether mortgage advisers can continue to recommend the bank as an option for their clients. ANZ spokeswoman Emma Mellow says banking regulations mean that customers who used loan repayment holidays now have to be recorded as if they had missed their loan repayments. “This would negatively affect their credit rating." The customers who chose this option were not in financial hardship, but proactively managing their particular situation – for example, an extended overseas holiday. We didn’t think these customers should have their credit rating impacted, when there are other suitable alternatives (which will depend on their situation).” Mellow says only a small number of customers use loan repayment holidays. Existing arrangements would continue, she says. Brokers are not allowed to publicly criticise lenders under the terms of their agreements. But one who did not want to be identified says he is concerned at the change. “I think it’s an absolute disgrace and another compelling reason why I would not send future business to ANZ… If that’s how they treat customers when they hit trouble.”
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UPFRONT COMMISSION STAYS AT ANZ
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on’t expect any changes to commission structures from ANZ any time soon. That’s the message from ANZ chief executive David Hisco. Although all three top mortgage advisers who took part in TMM’s Better Business Conference wanted trail commission, it’s not forthcoming from ANZ. When asked if the bank would change its mortgage adviser remuneration model Hisco told TMM, “It’s certainly not on my desk.” He says it’s logical that advisers prefer trail commission as it means that they could sell their businesses more easily. “It’s a lot easier for us to pay commission upfront,” he says. In the 12 months to September 35% of residential home loans were originated through the adviser channel. This was a slightly higher percentage than the previous year. Hisco, like other bank chief executives, says the bank isn’t rationing credit. “We’ve got plenty of money to lend,” he says.
NON-BANK LENDING RE-EMERGES
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his year has been kind for second-tier lenders, such as finance and mortgage companies, General Finance director James Lockie says. Non-bank lenders are receiving more applications than they generally can fund. “The main reason for this is that the banks have tightened up on their lending criteria. “This is a sensible strategy by the banks, as two or three years ago some of their lending was of poor quality, to say the least. At one stage we were losing finance company lending proposals to our banking competitors, which was ridiculous. “This has now stopped and we are in a more rational lending environment.” Lockie says next year should be good as the New Zealand economy is still performing well, and the global outlook is positive. The one negative is the ongoing political management of the country. However, there will be encouragement from the Government to build more homes. This will benefit lenders like General Finance, as people will continue to move houses and it is active in this bridging market. “There are always investors out there sourcing rundown properties, in order to tidy, improve and sell them.” Lockie says he expect continuing demand from those wishing to buy and expand their businesses. “If they can offer residential property as security, we are happy to fund these.” ✚
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PEOPLE
PEOPLE ON THE MOVE
Got a new appointment you would like to tell advisers about? Email details and a pic to editor@tmmonline.nz
Mortgage Link Appoints National Sales Manager
growth and imminent regulatory changes having Graham on board enables us to provide an even broader service and regulatory support function to our advisers.”
highlight of his career. “BNZ is in a very strong position and is wellplaced to accelerate its digital strategy and transformation, which will continue under Angela’s leadership,” says Healy.
Mortgage Express boosts Wellington team
Graham Clarke Mortgage Link has appointed Graham Clarke as its new national sales and development manager. Bringing 15 years finance experience in roles from teller to business development, Clarke’s most recent role was as business development manager for NZCU Baywide. Clarke says he is looking forward to the new role and "seeing the industry from the other side of the fence." "I will continue my relentless focus on the customer service experience, supporting Mortgage Link advisers to deliver world-class service and solutions to clients’ financial needs. "By growing the brand and strengthening relationships with lenders we will be able to continue to deliver positive outcomes for our clients,” says Clarke. Josh Bronkhorst, Mortgage Link managing director says he is thrilled to have someone of Graham`s calibre on board to further strengthen the Mortgage Link adviser offering. “Mortgage Link has doubled adviser numbers in the last two years and in light of the ongoing
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Angela Mentis
BNZ boss swaps jobs
BNZ has appointed Angela Mentis as managing director and chief executive. Incumbent chief executive Anthony Healy will take her current role, as chief customer officer, business and private banking, at NAB. “Angela is well-placed to ensure that BNZ remains focused on delivering for its customers, investors and employees,” says BNZ chair Doug McKay. “She has been on the BNZ board since December 2016 and knows BNZ and its strategy well.” NAB Group chief executive Andrew Thorburn says the changes will strengthen both the BNZ and NAB leadership teams. “These are outstanding opportunities for two of NAB’s talented executives to broaden their leadership in different environments. Angela and Anthony are superb banking executives with a clear understanding of what is needed to serve our customers,” says Thorburn. Healy described his eight years at BNZ as the
Chris Welch has returned to Wellington after three years in corporate and investment banking in London with a desire to help his clients achieve their dreams of home ownership. Along with an in-depth understanding of the Wellington property market, Welch explains that working as a mortgage adviser combines his background in banking with his genuine desire to see his clients buy their dream homes. Welch has local and international experience in client advisory roles. “I’m very driven and want the absolute best result for my clients,” says Welch. “Chris is a practical problem-solver who has excelled in the customer service arena,” says Mortgage Express CEO, Sarah Johnston. “I have no doubt he will prove his worth when it comes to securing the right financial package for his clients.”
Loan Market new advisers
Elizabeth Pereira has started in Lower Hutt. Hailing from teaching, Liz also has the benefit of guidance from her mother, who is quite a legend in the industry. We look forward to helping Liz build a strong, sustainable business. Tiffany Chang and Giri Giridharan have joined Gopal’s Waitakere LM business. Tiffiny has held administration roles in a couple of mortgage businesses. Giri has eight years in the currency foreign exchange industry and is now ready to start his mortgage business under Gopal’s mentorship. ✚
P2P LENDING
Snapshot PEER TO PEER LENDING The FMA has released its first-ever snapshot of what’s happening in the P2P lending space.
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nly a small number of borrowers are going back for a second loan from peer-topeer lenders, Financial Markets Authority data shows. In the year to the end of June, only 843 of more than 200,000 registered borrowers took out a second or subsequent loan. Repeat borrowers had loans worth $26.4 million in the year. New Zealanders have almost 17,000 loans
from peer-to-peer lenders but more than one in 12 are behind on their repayments. Just over 8.61% of outstanding loans are in arrears and 833 were written off in the year to June. The number is still tiny compared to the big banks – borrowers have fallen behind on billions of dollars in home loans. Most peer-to-peer loans are being issued at rates that are roughly in line with the personal loan rates available from banks. FMA data
shows the biggest percentage of peer-topeer loans issued in the year to June was at interest rates between 8% and 14.99% - that compares to an unsecured loan rate of about 14% available from the major banks. Peer-topeer platforms tie their interest rates to the creditworthiness of borrowers, indicating that the bulk of lending is happening to those with good credit histories – or something to secure the deal. ✚
BORROWER INFORMATION Total number of borrowers registered with P2P services Number of first-time borrowers Number of repeat borrowers Total value of loans taken out by repeat borrowers Total number of secured loans Total value of secured loans Number of borrowers borrowing the $2 million maximum
LOANS IN ARREARS OR WRITTEN OFF Total number of loans in arrears Total value of loans in arrears Percentage of outstanding loans in arrears Total number of loans written off Total value of loans writte off
VALUE OF OUTSTANDING LOANS ACROSS INTEREST RATE RANGES 0% - 7.99%
207,230 7,840 843 $26,388,604 612 $64,554,338 0
1,469 $20,446,190 8.61% 833 $8,529,177
26,516,642
8.00% - 14.99%
130,303,105
15.00% - 24.99% 25.00% +
109,873,088 45,381,981
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PROPERTY NEWS By Miriam Bell
Government moves
The ongoing market slowdown and the new government’s housing policy plans have dominated property news of late. Here’s our take on which of the related issues are most relevant to investors.
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fter setting out an ambitious plan for its first 100 days in office, the new Labour-led government has got off to a busy start in housing with related announcements coming thick and fast. First up, Labour's long-time housing spokesperson, Phil Twyford, was announced as the new Minister of Housing and Urban Development. His ministerial portfolio will include social housing, the private rental market and KiwiBuild as Prime Minister Jacinda Arden wants just one person responsible for all aspects of housing. Shortly afterwards, Finance Minister, Grant Robertson confirmed that negative gearing will be abolished and the bright line test will be extended from two to five years. Additionally, it was announced that the government plans to pass the Healthy Homes Guarantee Bill into law by Christmas. These were all key housing policies for the Labour party during the election campaign. As was the formation of a Tax Working Group to look at a broad suite of tax reforms, which would include a capital gains tax.
Phil Twyford The creation of that Tax Working Group is now underway. Terms of Reference for the group, which will be chaired by Sir Michael Cullen, have been released and the other members of the group are set to be announced by Christmas. Robertson doesn’t believe that individual
wage-earners, businesses, asset owners and speculators are paying their fair share of tax – and says they should be. “At the moment the tax system appears unfair – for example, it doesn’t treat income from speculation in housing as it does income from work, he says." We want to consider how we can create a better balanced system and can encourage a shift to investment in the productive economy.” But Robertson says, as promised during the election campaign, certain areas will be outside the scope of the review, including changes that would apply to the family home or land beneath it. Further, any significant changes legislated for from the Group’s final report will not come into force until the 2021 tax year, after the next election. The new government has also commissioned an independent review of the state of housing in New Zealand. It will be carried out by economist Shamubeel Eaqub, Otago University Professor of Public Health Philippa Howden-Chapman, and Salvation Army senior policy analyst Alan Johnson and a report is due by Christmas.
New investors, speculators to suffer
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ome of the new government's policies – notably abolishing negative gearing and extending the bright line test to five years - will hit some investors harder than others, according to an industry expert. Auckland Property Investors Association president Andrew Bruce says these changes will have differing levels of impact on investors depending on the length of time they’ve been investing, and the type of investment approach that they have. “The changes to negative gearing will have a quite significant impact on those at the beginning of their investment career.” New property investors are often vulnerable
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Andrew Bruce
when it comes to cash flow, and negative gearing enabled them to use losses on one property to offset tax on other income, he says. “The abolition of negative gearing is going to make life a lot harder for starter investors.” Conversely, Bruce believes that the extension of the bright line test to five years is more likely to affect property speculators rather than long-term investors. "The majority of property investors are in it for longer than five years and are unlikely to feel massive levels of pain with the extension of the bright line test." Back in March, then Labour leader Andrew Little said the changes to negative gearing and the bright line test would be slowly phased in over the next five years, coming into full effect by 2022. However, this timeframe has not since been confirmed.
Rental case reversal good news
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ne piece of positive news for investors the Dunedin District Court has overturned a controversial Tenancy Tribunal ruling. The District Court’s decision has been widely lauded by rental property providers. Dunedin rental property owner Vic Inglis had been ordered by the Tribunal to pay back his former tenant Natalie Parry over $10,000 in rent after she discovered some alterations in the rental weren't permitted. But, in November, the decision was overturned by Judge Kevin Phillips and Parry was ordered to pay back the amount she had earlier received from Inglis. Phillips stated that the Tribunal was wrong in its original decision when it found that what was essentially a technical breach, was "unlawful". He also stated that Parry had not suffered any detriment from this technical breach.
For NZ Property Investors Federation executive officer Andrew King, the outcome is good news for the rental industry. He says that not only does it overturn the Vic Inglis Tenancy Tribunal decision, but it actually goes quite a bit further. "It states that the original High Court ruling is not binding on the Tenancy Tribunal, which should mean that adjudicators can make rulings in unlawful premise cases brought before them and can use all of the sections in the RTA when making their decisions." "This means they can consider the degree of unlawfulness, the degree of harm caused to tenants, and ensure that resolutions are fair." King says he has contacted the principle tenancy adjudicator about the ruling and is confident they will see a directive from her to adjudicators clarifying how unlawful properties will be handled going forward.
Healthy homes now law
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nvestors are bracing for the introduction of minimum standards for rental properties after the the Healthy Homes Guarantee Bill passed its third reading in Parliament early in December. The new legislation will enable the government to establish minimum standards for insulation, heating, ventilation, draught stopping, drainage and moisture in all rental properties. While the requirements of the standards are not specified in the legislation, the government aims to have the standards set within the next 18 months. Minister of Housing and Urban Development, Phil Twyford says every New Zealander deserves a warm, healthy home to live in and the legislation will help ensure that. "Most landlords do a good job, but a lack of legal standards means some rentals are not currently fit to live in," he says. “Many landlords will already meet these standards and will not have to change anything. For those who need to upgrade their properties, government grants [of up to $3,000] for installing heating and insulation will be available.” However, opponents of the legislation say it
means extra costs for landlords which will be simply passed on to tenants. NZ Property Investors Federation executive officer Andrew King says, overall, he supports rental property standards – but believes they need to be truly beneficial and cost effective. “That’s for both landlords and tenants because ultimately the additional costs will fall on tenants.” King believes the current system whereby if a rental property is insulated to 1978 standards the insulation does not need to be upgraded is better than the Bill’s proposal for all properties to be insulated to current standards. The increased efficiency between the 1978 and present standards is only about 5% and yet the cost is almost the same as installing completely new insulation, King says. “We believe that the cost and value benefits of doing this are simply not there. Tenants will see little benefit but it will up the costs for landlords and that translates to increased rents.” It was unclear what else the standards will include at this point, although heat pumps are looking likely, but King hopes the consultation is genuine and that the final standards offer choice. ✚
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HOUSING COMMENTARY By Joanna Mathers
SPRING HEATS UP Spring is starting to shape up like any other normal season – with the exception of a few key locations, writes Joanna Mathers.
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ith the new Labour/NZ First coalition now holding power, it’s unsurprising there have been some jitters in the property market. They, along with the Greens (who entered into a confidence and supply agreement with Labour) all placed housing affordability at the top of their list of priorities. And they didn’t waste any time, with representatives confirming that the bright line test will be extended to five years and negative gearing will be abolished. Andrew Bruce from Auckland Property Investors Association says while the bright line extension is more likely to affect those in
the speculative side of the property business, negative gearing will impact investors just starting out. “Those looking to start out in the property investment business are often in a vulnerable position when it comes to cash flow and negative gearing enabling them to use losses on one property to offset tax on other income,” he says. He believes that these changes could hit such investors hard. New government aside, the property market was a little more buoyant in October - unless you live in Auckland. Here’s a rundown of what’s been happening around the country.
SPRING HEATS SLOWING MARKET
Property pessimists will have been pleasantly surprised as winter’s housing chill lifted slightly and the nation’s house prices reached a new median high in October, according to REINZ data. But there’s an addendum; while 14 of the 16 regions climbed, Auckland has started slipping. The fall of 3.2% to a median of $850,000 represents the biggest fall in house values since December 2010. Nelson also dropped by 6.8% - the region’s average is now $447,500. The Trade Me Property Price Index was also
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more positive. Spring saw the national average rise by 2.7% from September, to $623,700. It's been lean pickings for buyers over the last five months, with little housing stock available nationwide, but October saw the market perk up with 30% more listings on the site than in September. Head of Trade Me Property Nigel Jeffries says while October is traditionally buoyant, it’s taken a little more time than usual for sales to kick in. “Usually by this time of year we expect to see the property market in full swing, but with the election in play it’s pushed everything back. We’re starting to see some of the movement we’d normally expect in this peak buying and selling season," he says. The QV figures were most notable for the first negative annual growth in Auckland for over half a decade. The year-on-year figures showed a small but significant 0.6% decrease in value. QV national spokesperson Andrea Rush says nationwide the frenzy induced by high investor numbers is subsiding. “In general, there appears to be a trend of slowing in the rate of growth, and a return to more normal levels of activity in housing markets around the country,” she says. Nelson and Hawke’s Bay continued the trend seen earlier in the year towards stronger growth in the regions, and South Wairarapa, the Far North, and Ruapehu have all performed well. Wellington has continued its strong growth, but values in Christchurch dropped by 1.8%. Barfoot and Thompson’s figures for October revealed little movement, with the average selling price in Auckland sitting at $910,537. The median house price in October was $830,000. “The Auckland housing market has been unfazed by the political change that has occurred,” says Barfoot and Thompson managing director Peter Thompson. Although prices of properties sold through Barfoot and Thompson declined by nearly 1% Thompson says when considered over a threemonth period, values remained stable. “There has been no panic selling, any hopes of post-election price increases have evaporated, the new Government has done no more than confirm its pre-election commitments and buyers are still being cautious making purchase decisions.” Rounding up the data, Harcourts’ October figures showed a market influx, with slower movement than in 2016, and a 1% decrease in average house values to $586,954. The 19.9% reduction in auctions was indicative of the market slow down; with Harcourts CEO Chris Kennedy saying there was a common belief by both buyers and sellers that auctions were an effective sales method only in a booming market.
AUCKLAND’S RV EXPLOSION
The fact that it was expected didn’t dampen the magnitude of Auckland Council’s most recent residential value announcement. Residential values in Auckland have skyrocketed 46% across the board in the last three years, with outer suburbs leading the charge. Waiheke Island saw the highest rate of growth; up 64% since the 2014 valuation.
Papakura and Papatoetoe-Otara both rose by more than 60%. While property owners may worry about the implications of these values on rates, Auckland Council head of rates Debbie Acott says there won’t necessarily be a corresponding increase. “Property valuations are used to help us work out everyone’s share of rates – they don’t mean that we collect any more money. However, we won’t know the impact of this revaluation on rates until we agree our next budget in 2018, so I encourage Aucklanders to view these valuations with that in mind.”
LVR LOOSENING BEGINS
RBNZ didn’t shock many as it held the OCR steady at 1.75% in early November and predicted CPI inflation to reach the midpoint of the target range, reaching 2% by the middle of next year. More interesting was the announcement at the tail end of the Monetary Policy Statement (MPS) press conference that the conditions for reversing the LVR would be examined at a Financial Stability Review in November. RBNZ conequentially annouced it would increase the LVR cap on new mortage lending to 15% and also ease restrictins for investors from January 2018. There was also talk of debt to income policy (DTI) being discussed in order to see how such a policy may work.
HEALTHY HOMES FAST TRACKED
Labour has been agitating for an amendment to the Residential Tenancies Act 1986 for a while now and original Healthy Homes Guarantee Bill proponent Phil Twyford plans to fast-track the bill now Labour is in power. Under the provisions of the Bill, landlords will be required to meet minimum heating and insulation standards in rentals. But certain details of the Bill may prove problematic. While no one wants to rent out cold, damp homes, some of the Bill’s details are said to necessitate landlords make changes that aren’t necessary. “Labour indicated it wasn’t happy with homes being insulated to 1978 standards [which was the requirement for rentals under National’s Residential Tenancies Amendment Bill],” says Andrew Bruce from Auckland Property Investors’ Association. Research undertaken by NZ Property Investors’ Federation shows that modern insulation only resulted in a 5% gain in efficiency when compared to the 1978 standards. “It will be disappointing if landlords must reinsulate already adequately insulated homes to achieve these standards. The cost benefit analysis isn’t favourable.” Labour also indicated that it is in favour of heat pumps being installed in all rentals, which may be problematic for those who own apartments. “Additionally, most apartment dwellers will tell you that the issue isn’t keeping apartments warm, it’s cooling them down,” says Bruce. ✚
REINZ SALES: DOWN
Once seasonally adjusted, sales volumes year-on-year fell once again around the country, and particularly in Auckland, in October.
INTEREST RATES: NEUTRAL
Interest rates remain low, but banks are announcing both small rises and falls in various rates periodically.
OCR: DOWN
The Reserve Bank left the OCR on hold at the record low of 1.75% in November.
IMMIGRATION: DOWN
Annual net migration dropped once again in October. However, monthly net migration was up in October as compared to September.
BUILDING CONSENTS: DOWN
Once seasonally adjusted, building consents fell, both nationally and in Auckland, in September. But Statistics NZ says that, overall, consents have lifted in recent months.
MORTGAGE APPROVALS: NEUTRAL
Reserve Bank data shows that mortgage lending overall increased by a small amount in October, but the share of lending going to investors barely budged and remains low.
RENTS: NEUTRAL
The average national rent remained unchanged in October as did the average rent in Wellington – although the average rent went up in Auckland.
REGULATION LEGAL By Susan Edmunds
Next stop licensing; All aboard Many mortgage advisers will need a licence to operate in the future. Susan Edmunds finds out what this may involve.
W
hen the new financial advice regulation passes through Parliament, advice businesses, rather than individuals, will need a
licence to operate. Mortgage advisers will have to decide whether to apply to license their own businesses as financial advice providers (FAP) or fall under the wing of a larger organisation. The Financial Markets Authority (FMA) will be responsible for issuing licences, and it will be a two-step process. First, advisers will have to get a transitional licence and then a full licence when the new regulations fully apply. At this stage the FMA hasn’t decided what will be required for either a transitional licence or a full licence. However, Ministry of Business Innovation and Employment senior policy
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analyst Sharon Corbett has indicated that it will be a “simple” process and could just involve “fit and proper checks” and “some information on the services a firm is providing”. She says licensing is likely to happen in 2019 and “there will be lots of noise to contend with” and “strategic repositioning of players in the market”. FMA principal consultant Derek Grantham agrees, “the intention is transitional licensing will be straight-forward. We are mindful of keeping this as simple and pragmatic as we can.” It is estimated that about 1600 registered financial advisers will seek licences under the new regulations. While the details of adviser licensing are unknown at this stage various other players in the financial services market have recently been through licensing processes under the Financial
Markets Conduct Act (FMCA). These include managed investment schemes and advisers who provide Discretionary Investment Management Schemes (DIMS). Newton Ross director Wayne Ross says the DIMS licensing process took a significant amount of time for a firm which had just four advisers. “It did take a lot of time and effort. In the end it ended up being a tickbox exercise.” There have been concerns that licensing will drive smaller, independent financial advisers and mortgage advisers to join large firms. Corbett says this is untrue. “Licensing doesn’t require you to join a big entity,” she says. “A single adviser can get a licence.” Pathfinder Asset Management chief
executive, John Berry, who is also a member of the working group developing the code of conduct, says it should not be assumed the licensing hurdle would be insurmountable. He and Ross say the licensing process does take time, and that starting to think about it early is important. “I would encourage people to think about it sooner rather than later,” Berry says. He says there were a number of ways mortgage advisers can prepare. They can start by making sure they understand their business processes and are able to articulate them clearly. That would mean having written policies and procedures. It should be expected that mortgage advice businesses will have to meet many of the same requirements that existing Financial Markets Conduct Act licence-holders meet – their
directors and senior managers have to be fit and proper for their positions, they must be able to prove the business is capable of performing the service effectively and the FMA must have no reason to think it would contravene its licensee obligations. Berry says the application would begin with the FMA looking at the nature and size of the firm, including how many clients it had and what policy documents were in place, and who it engaged to give advice on its behalf. He says part of the application would be an opportunity for advisers to explain what their business did. They could show the FMA their firm’s philosophy, or how it added value for clients in a way that competitors did not. Businesses could also show the regulator why they were lower-risk, perhaps because they had good processes or focused on a certain type of client and product, or had full transparency with their clients. The aim of the introductory part of the application will be to help the FMA get a clear understanding of the business. Then they would need to get into the process of detailing who was in the business team and the skills they had, their roles and responsibilities and how new staff were recruited. They might also need to show how they tapped into external advice if they lacked specific expertise. The FMA would also want to see the business’ process for bringing new clients on board, how product was selected and how conflicts of interest were managed. Client reporting would need to be detailed and information would have to be given of any outsourcing arrangements. Other questions to consider in this part of the process would be how risks were identified and mitigated, whether the business had appropriate financial resources, how it advertised and how it dealt with complaints. The final part of the application would deal with the governance of a business. For big firms, this would involve the workings of the board and how it accessed information about the business. But Berry says it is unlikely that small advice firms would be expected to present such a detailed governance arrangement. “A lot of advice businesses are one-person organisations and are unlikely to need a full governance structure.” Berry says, when the FMA was licensing DIMS providers, it did not require small advice firms to have the complex board structures with independent directors that it required of big companies. He says mortgage advice businesses would still need to set time aside to consider how their business was governed, the areas of risk and how they were mitigated. He suggests advisers set up a habit in which each month they sit down and think, at a high level, about the operation of the business and how it is structured to provide good customer outcomes. Berry says there is a base level of work that advisers can do now to get ready for what
would likely be required. Although there is still significant uncertainty about what will be required, Berry says there are benefits to preparing early. That might involve a deep-dive into the workings of the business and giving thought to how FMA questions would be answered. Advice businesses would need to show consistency, he says. You can’t do that if every day you’re making decisions based on how you are feeling that day. It has to be a structured process,” he says. But he says those who applied early, as soon as it became possible, will get the benefit. The FMA would be eager to engage and take the time to understand the application. As the deadline for licensing approached, more pressure would go on and the regulator would have less time to spend on each application. Ross says the FMA looked at six areas in the DIMS licencing process and some of them had little relevance, or were more appropriate to a larger corporate. The company has to calculate its NTA and report quarterly to the FMA, however, there is no balance sheet risk to clients using DIMS. Governance issues were another area where the regulator took an approach which didn’t fit with small financial advisory businesses, he says. The company now runs a quarterly compliance assurance programme. Ross says many of the things they now had to do under their DIMS licence is an “on-going drain on resources.” Industry commentator David Whyte says mortgage advice should be seen as low-risk by the regulator. “There are not many instances of mortgage brokers going rogue,” he says. "The process should not be onerous, and should leave licensed businesses better off, says Whyte. ✚
❝ I would encourage people to think about it sooner rather than later.❞ -John Berry
LEAD STORY
ADDING NEW REVENUE STREAMS TO YOUR BUSINESS It's more than just mortgages Advisers should consider offering advice on other products – for the sake of their clients, and their businesses.
M
ortgage advisers must do more than just offer bank-issued home loans if they are to thrive in a new economic environment. As the housing market slows in many parts of the country, and interest rates rise, some mortgage advisers are feeling the pinch. But there is a growing movement to diversify mortgage advice businesses, to offset some of that slowdown and future-proof for other
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market cycles. Adding more products to an advice arsenal – whether that’s insurance, KiwiSaver or another financial product - allows for more touchpoints with clients, more opportunities to ring-fence their business so they are not poached by another provider, and more streams of income. Mark Collins, chief executive of Mike Pero Mortgages, says over the next few years, mortgage advice would become a tougher job
for many advisers in New Zealand. “The market has been just so stellar for the last eight or 10 years and it tends to go in cycles. For most mortgage advisers, until a year or so ago their clients came to see them and got reduced interest rates and some cash. That’s better than shooting fish in a barrel,” he says. “Now that’s not the case. Now you are likely to get the same or a worse rate and you’re unlikely to get any cash. [Advisers] have to work
harder for your money.” But he says mortgage advisers could be missing an important opportunity. People went to brokers and advisers of all descriptions because they wanted advice, not just a particular product. He says that was not limited to just being told about the best home loan interest rates available or how to structure a mortgage. They might want assistance with many other aspects of their financial lives, too. There would be benefits for advisers who could become a “one-stop shop”, advising clients not only on how to get a loan but how to pay it off and how to protect the debt, insure themselves and insure their belongings with fire and general insurance, too. Collins says it is a development that many mortgage advisers would not be able to ignore. “It’s critical for the survival of the mortgage advice industry.”
INSURANCE Collins says insurance seems a natural fit to offer alongside home loans. “If you’re putting someone into debt, you should have a conversation about insuring that debt. But traditionally they haven’t done that.” John Bolton, founder of broking firm Squirrel says about 10% of his mortgage advice business has diversified to non-mortgage income streams. “Ideally, we’d do about 25% but it’s harder than you think.” He says he has two specialist insurance advisers in the Squirrel team but had also trained mortgage advisers to do insurance. “Most still prefer to refer and not write themselves. I’ve found it challenging building insurance into the business. This time around we’ve put more focus on processes and systems.” A spokesman for Fidelity Life says the insurer is aware of a number of mortgage brokers offering insurance solutions, including big players such as Mike Pero and New Zealand Home Loans. Naomi Ballantyne, managing director of Partners Life, says “a few” mortgage advisers offered risk advice too. “A larger number refer clients to a risk colleague to give the insurance advice. Some do nothing as they expect the bank will sell insurance to their mortgage clients so don’t bother. When mortgage markets slow, as a general rule mortgage advisers get much more interested in cross-sell opportunities.” She says advisers would need to get in touch with insurers if they wanted to branch out. “We all have our own internal criteria to determine whether they can get a direct agency with us or if they need to join an existing risk advisory practice so they have supervision, process and support. We need three years’ risk experience before we grant a direct agency.” Insurers also often offer a wider range of commission options – from high upfront commissions of up to 200% of premiums in some cases, to spread or hybrid options that
❝ Most still prefer to
refer and not write themselves. I’ve found it challenging building insurance into the business. ❞ -John Bolton can offer around 30% each year in servicing commissions – this may be attractive to mortgage brokers who traditionally have not been able to access a lot of trail commission. One high-profile broking firm, Mortgage People, has built up a sizeable insurance arm, run by adviser Katrina Church, under the Insurance People brand. It has eight mortgage advisers, three life insurance advisers, four in domestic fire and general and three doing commercial fire and general. Simon Fisher, one of a group of three who recently bought the business, says diversification had appealed. Many firms tried to do it but failed, he says. Gary Young, chief executive of the Insurance Brokers Association of NZ, which primarily represents fire and general brokers, says general insurance was another good fit for mortgage advisers. Tower is the main insurer that deals with mortgage brokers. It has been approached for comment. A spokeswoman for NZI says her firm suggests mortgage advisers approached Tower instead. “If you’re dealing with someone who is financing their house, insurance is a logical next step to protect the client. Most banks require insurance anyway, I guess it’s logical,” Young says. He says the most important consideration would be whether the adviser had the knowledge and contacts to advise on fire and general insurance. “I suspect most have an agency with one insurer and sell that one rather than giving the client choice. The problem then is they are not giving advice, they’re just selling something.”
KIWISAVER KiwiSaver is another no-brainer for mortgage advisers but few are embracing it, says Booster chief investment officer David Beattie. He says there are not many mortgage
advisers dealing with Booster’s KiwiSaver products, but it made sense for them to do so. “In their minds they’re thinking there’s a difference between a category two product and a category one product, even though at a certain level, if they’re offering just general advice there doesn’t need to be. Not enough get the concept of sitting down and taking a more holistic approach to a client instead of being so specific.” The new advice rules introduced under the Financial Services Legislation Amendment Bill (FSLAB), which will bring mortgage advisers into the same licensed environment as all other financial advisers, could help to reduce that mental barrier between home loans and other products, he says. “That is something a number may look to review once the legislation has passed.” He says it would be good for their businesses to offer more than mortgages. “The more touchpoints you have with clients the better it should be, across the board.” KiwiSaver is a good tie-in with mortgages because of the benefits it offered those buying a home. First-home buyer members have the ability to withdraw from their accounts to pay for the deposit and can qualify for a subsidy if they meet income and house price caps. Being able to offer advice on how to position a KiwiSaver account to make the most of that would be a selling point for an adviser. “If they can establish a relationship with the client at that time it should set them up for a much longer-term relationship than just doing a deal on the mortgage,” Beattie says. He says there should not be significant cost involved. Booster would offer advisers a system and work with them to review processes to keep their liability to a minimum. But he says the reluctance to diversify was not limited to mortgage advisers – Booster also offers a home loan product with Resimac for its KiwiSaver advisers to offer clients but has had limited take-up. Data from Generate shows an adviser with 225 KiwiSaver members on the books and just over $4m under management would make about $10,250 a year in trail commissions. An adviser group with 4115 KiwiSaver members and $46.2m FUM would earn $115,539 per year in trail. David Hart, former chief executive of Loan Market and now with Mortgage Supply Co in Bay of Plenty, says his business offered insurance and KiwiSaver advice. But rather than doing it in-house, the team referred on to specialist advisers. “It’s such a specialised field now. Even mortgage broking is super specific. We prefer to refer to established specialists in that field.” He says that means the client is better looked after while maintaining his firm’s relationship with them. “You can’t be all things to all people today.” Hart’s business would then get a referral fee from the deal. Josh Bronkhorst, managing director of MortgageLink, says many advisers had been confused about how to offer class advice on KiwiSaver, and had instead avoided it completely.
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LEAD STORY But, over the past couple of years, they had realised they were able to do a lot more than they originally thought. “It’s a fear of the unknown.” FSLAB would consolidate that shift, he says, as all advisers came under the same regime.
BUSINESS LENDING More advice businesses are looking to provide funding to small businesses too. Spotcap is now working with a number of mortgage advisers in New Zealand – it uses an automated algorithm to scan bank accounts to determine whether a client has the ability to service a loan. It launched in New Zealand this year with support from Heartland Bank. New Zealand managing director Lachlan Heussler says it had working relationships with hundreds of mortgage advisers, including the NZFSG and Mortgage Express networks. “We have tried to make the process of partnering with Spotcap and diversifying to offer business finance as simple as possible. It only takes a couple of minutes to become accredited through our online process and can immediately begin to refer clients to Spotcap via our online portal. Applications can take as little as five minutes and there is no paperwork required.” Sales and partnerships manager Ben Murphy says there is an increasing opportunity for advisers to diversify as their knowledge of commercial lending increased. “A lot of their clients own small business and need funding, but mortgage advisers simply aren’t aware of the opportunity. At Spotcap, we are hoping to educate the mortgage advisers in New Zealand as to this opportunity and help them diversify their own businesses in the process.”
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❝ For most mortgage advisers, until a year or so ago their clients came to see them and got reduced interest rates and some cash. That’s better than shooting fish in a barrel.❞ -Mark Collins PEER-TO-PEER Southern Cross, which has been working with mortgage brokers as a non-bank lender for many years, became a peer-to-peer provider at the end of last year. Chief executive Luke Jackson says that opened another potential line of work for mortgage advisers, as it sought investors to
put their money into home loans. “There’s a heap more of a non-bank mortgage market than there has historically been and more opportunity for us to provide loans. In order for us to do that, we need investors on the other side.” He says he is not asking advisers to give investment advice to clients - just to pass on a referral of a client they thought might be interested. If the referral turned into an investment via the peer-to-peer platform, the adviser would receive a payment of 1% of the value. He says while most mortgage advisers had not yet been involved in investment conversations with their clients, those with a broader database or a bigger voice in their local community or networks had the opportunity to make people aware of the peer-to-peer options that were available. “It’s working well for them,” he says. “It’s helping us build market awareness and it gives the adviser another conversation for them to have as well.” Jackson says the market seems tough for mortgage advisers and more would need to look for other ways to thrive. “Particularly the ones who have built a business just on referring bankable deals to banks. Those are the ones struggling, that’s the side clamping down. Those who have established relationships with non-bank providers and have diversified and provide a bigger offering, it’s a better market for them. There’s still providers out there wanting to help people get finance, it’s a matter of knowing where to go and how to present the deal.” Other options for those looking at business diversification included equity release products and commercial, vehicle and consumer finance. Collins says diversification would mean significant change for some advisers. But he says it is a move that has to happen.
“For the last eight or 10 years... it’s always difficult to say it’s an easy market but commission rates have been good, house prices have been going up, there’s been cash and better rates on offer. There wasn’t a lot of selling going on, there was a lot of order filling.” Many advisers have been so busy over recent years that they have focused on keeping on top of the workload rolling in, not seeking out anything more. Most have not had time to think about any other business opportunities. “I’ve always been a fan of the full-service model but it’s more important than ever now. We’re starting to see the businesses that are successful are doing a wider job and becoming more successful. Those specialists will start to struggle,” says Collins.
DIY OR REFER OUT? Collins says referring the business to another adviser or taking a DIY approach could both be viable options, depending on the adviser and how their business works. Regional advisers and smaller advice firms are most likely to diversify by dabbling in other products themselves, he says, while bigger firms and those in bigger centres are more commonly striking up referral relationships with other specialists. “There’s a place for both. First-home buyers often have simple insurance needs. They’re younger, they just need something to cover the personal side, life insurance. But if you’ve already got insurance, you’re a bit older, there are other things that come into play and you might need someone with experience.” Emma Johns, owner of NZ Home Loans in Whangarei South and Kerikeri, says her clients value a full service. Her officers offer fire and general and personal risk cover as well as mortgage advice. “We wrap that all up with financial advice. It’s so much easier. You
find the same thing with banks – if a client’s mortgage is with a bank they are likely to have their insurance and house and contents with them as well.” Diversification makes the business more robust, she says. “If you’re supporting people with lots of their needs they are more likely to stay with you as a client. You’re helping them with not one thing but two or three, it’s really important. You can take account of all these things as you go and when you’re reviewing.” Dave Windler, director of The Mortgage Supply Co, says one of the defining features of a mortgage advice business is that each could be different to the others. “Everyone has got a slightly different way of working that suits them.” Windler says, if he were new to the industry, he would start a diversified business model. Operating in a small town, it would probably be necessary, too," he says. But he says as more commission options including better trail become available, there will be less need for multiple income streams. There is also business benefit in having a clear idea of what you wanted to do and sticking to that, he says. “It would depend on what your niche is. We’re mortgage specialists and that becomes what your proposition is. Some might have the proposition that they will take care of you across the board, that’s just as viable a proposition. I think whichever path you go down, be definite about it so that the client can understand your position and know what to expect from the way you work. Don’t flip flop. Think about what suits you and stick to that.” He says those who diversified will need to feel comfortable that they can offer relevant expertise across the products they advised on. Additional products should not be offered as an after-thought, Windler says. “It’s not just ‘would you like fries with that?’
It is not a cross-sell. If you’re going to diversify you should remove that phraseology from your vocabulary. You should be as capable of advising in one product as another, as capable of meeting a client and advising just on insurance if that’s what they need. That’s a nuance worth pointing out.” Bronkhorst says it was something MortgageLink was working on. “In our group you do see quite a few who do insurance in addition to the mortgages, in some cases a bit of KiwiSaver, sometimes they refer fire and general.” He says MortgageLink promotes a holistic approach to advice. “But it’s very dependent on the adviser. Some do well with diversification but others don’t. While we promote holistic advice it doesn’t mean the adviser themselves has to provide that. In a lot of case sit’s more of a referral than the individual doing it themselves. Most advisers get really comfortable doing what they do best and when the market is going well as we’ve had in the mortgage business … advisers don’t feel they need to diversify unless it’s part of their business planning.” It was tough to determine what an ideal percentage breakdown of business was, he says, but it could be between 70% and 80% mortgages and 20% to 30% other income streams. Bronkhorst says good business practice should see advisers taking into account how they want to develop other products. “If you want to have the sort of business that can get through ups and downs it’s a lot easier if you’ve got multiple streams of services to provide to clients. You’re earning more money from those same clients and you’re ringfencing those clients. If you’re doing their mortgage, insurance, fire and general and KiwiSaver, it becomes less likely that another advice is going to poach them.” ✚
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ANZ INVESTOR SURVEY
Property remains asset of choice to grow wealth Property investors face many challenges, but they remain committed to their asset class of choice.
A
recent survey shows the economic and investment tide is turning, but that isn’t putting off property investors. Indeed property investors are “wholeheartedly committed to the asset class as a place to invest,” ANZ head of mortgages Glenn Stevenson says. The residential property investment survey is done annually by ANZ and the NZ Property Investors Federation. Stevenson says investors face a range of
❝ Property investors are wholeheartedly committed to the asset class as a place to invest ❞ -Glenn Stevenson
challenges including lending restrictions, increased compliance, damage issues and tenant issues. Despite this they haven’t been put off the asset class. “We would need to see significant change before their sentiment would change,” he says. The survey results reflect what we are seeing in the market, he says. “Investors are being more careful, or weary about their next move.” Interestingly, despite the raft of regulatory changes affecting investors over the past couple of years, the majority of the 974 respondents - of whom around half are classed as small investors - are still planning to hold their investments for the long term. It is noticeable that the percentage
expecting positive value changes in the range of 2.5% - 10% over the short term, is at 50% down from 62% in 2016. And probably not surprisingly - the proportion expecting values to rise by as much as 11% - 20% in the next year has fallen back very significantly, to 3% compared with 19% in 2016, when the market was still particularly strong. Stevenson says investors have traditionally been bullish on house price increases, but they are not “far more realistic than they have been before.” Meanwhile, 13% expect zero growth in the next year - in contrast to 4% this time last year, but taking a five-year outlook, 74% of investors are still feeling positive and expect values to rise. (Refer to table 1 below)
EXPECTED CHANGES IN REGIONAL RENTAL INCOME
❶
OVER THE NEXT 5 YEARS
2016
2017
Auckland
Waikato
Wellington Region
Canterbury
Otago
95%
95%
93%
84%
90%
Zero growth
1%
0%
0%
7%
0%
% annual decrease
3%
2%
4%
7%
7%
Auckland
Waikato
Wellington Region
Canterbury
Otago
% annual increase
91%
89%
96%
81%
93%
Zero growth
1%
0%
0%
7%
7%
% annual decrease
4%
4%
2%
8%
0%
% annual increase
Canterbury investors are more optimistic over the medium term with 81% saying they think rental income will increase and only 8% expecting a decrease.
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CHALLENGES AHEAD The survey shows investors do have some anxieties around further regulatory changes (52% cited it as a major concern), but given the recent change of government, it’s possible this number would now be even higher. Damage to rentals also emerges as
PROPERTY INVESTMENT RISKS – TOP 5
❷
AUCKLAND Methamphetamine contamination
49%
Damage to property
33%
Tenant defaulting on payments
24%
Loan to value ratio restrictions
23%
Tax changes
20%
REST OF NORTH ISLAND Methamphetamine contamination
54%
Damage to property
36%
Tenant defaulting on payments
22%
Tax changes
20%
Loan to value ratio restrictions
19%
REST OF SOUTH ISLAND Methamphetamine contamination
66%
Damage to property
35%
Building Warrant of Fitness
26%
Loan to value ratio restrictions
22%
Tenant defaulting on payments
19%
WAIKATO Methamphetamine contamination
56%
Tax changes
28%
Damage to property
21%
Loan to value ratio restrictions
21%
Building Warrant of Fitness
18%
WELLINGTON Damage to property
28%
Tax changes
26%
Loan to value ratio restrictions
26%
Methamphetamine contamination
24%
Tenant defaulting on payments
22%
a leading worry, with 35% of investors stating it as an issue, especially when it is methamphetamine-related. (Refer to table 2 left) The regulatory effect of the LVR rules is another key factor that sees rental owners feeling especially concerned right now. These restrictions were introduced in late 2013 by the Reserve Bank, for the purpose of reining in what was regarded as a runaway investment property market and, under the new rules, investors are required to front up with 40% deposit for new loans. This has squeezed small-time ‘mum and dad investors’ in particular, as they often have limited equity. The number of survey respondents who have found themselves simply unable to buy further properties, because of these new rules has risen from 18% in 2016, to 33% this August. This is quite a marked difference, year-on-year, and suggests that the controls have really kicked in. The LVR rules have had a significant impact on investors’ planning, with regards to future strategy too, with 47% of respondents reporting they’ve changed their approach as the result of their effect. This is a notable jump, when compared to 31% in the 2016 survey, which was taken at a time when the long-term implications of the new regulations were perhaps only just hitting home. It wasn’t that long ago - back in 2015 that 84% of investors were still saying that the LVR limits had not changed their strategy at all. “This swing was a very big stand-out for me in this year’s survey result,” says Stevenson. “It’s a pretty clear articulation that the LVRs really are starting to bite at last, and I think that the Reserve Bank will be feeling pretty pleased. “It was surprising that it took so long, but now I think this is a fair representation of the current environment.” Since the survey was conducted the Reserve Bank has eased, slightly, the lending restrictions. From 1 January 2018, the LVR restrictions
32%
Loan to value ratio restrictions
28%
Damage to property
22%
Tax changes
17%
Meth damage is the highest concern across all regions except Wellington. The next top concern varies among the regions: damage to property in Auckland, tax changes in Waikato and Wellington and rental prices decreasing in Canterbury.
In an interesting twist, despite all of this, after falling during the period 2011-2016, the number of investors planning to buy again has stabilised and almost 70% say that they will; 61% of Auckland investors are in this camp and Stevenson isn’t surprised. “I think that in Auckland you have a bunch of people who are absolutely committed to it, as a place to invest. No matter what happens they are invariably there for the long term. “Auckland’s dynamic reflects that and I think they still see it as a part of the country that is prone to big growth,” he says. The Auckland stats are interesting. While 93% expect a value increase in 2016 that percentage is now at 74%. However, the difference is less marked over the medium term, with 87% of Aucklanders still expecting growth over the next five years, compared with 92% last year.
DRUGS AND DAMAGE While damage of any kind by tenants is always a problem for landlords, the ongoing ‘P’ issue is clearly being taken more seriously, with 48% of investors citing it as their main concern in terms of damage to rental properties – up from 38% in 2016. Widespread news coverage of the methamphetamine problem has no doubt contributed to their fears. Although the new Meth Standards are now in place and provide much-needed clarity for those affected by contamination, in some cases a stigma still remains around contaminated properties. ✚
❸
OVER THE NEXT 5 YEARS
2016
Auckland
Waikato
Wellington Region
Canterbury
Otago
% annual increase
92%
96%
96%
95%
90%
Zero growth
2%
0%
0%
1%
0%
% annual decrease
5%
2%
0%
3%
5%
Auckland
Waikato
Wellington Region
Canterbury
Otago
% annual increase
87%
87%
94%
88%
93%
Zero growth
5%
3%
1%
6%
7%
% annual decrease
8%
10%
5%
6%
0%
41%
Rental prices decreasing
INVESTORS PLANNING TO BUY
EXPECTED CHANGES IN REGIONAL INVESTMENT PROPERTY VALUE
CANTERBURY Methamphetamine contamination
will require that: ➤ No more than 15% (currently 10%) of each bank’s new mortgage lending to owner occupiers can be at LVRs of more than 80%. ➤ No more than 5% of each bank’s new mortgage lending to residential property investors can be at LVRs of more than 65% (currently 60%). (Refer to table 3 below)
2017
Wellington investors are the most optimistic in the short term with 89% expecting values to rise in the next year. Canterbury are the least optimistic with 59% expecting values to increase. This shows a similar profile to rental expectations, with an increase in investors expecting zero or negative growth. However, over the next five years, 88% of Canterbury investors are expecting values to increase. There is an increase across most regions in investors expecting zero or negative growth.
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SALES & MARKETING LEGAL By Paul Watkins
SERVICE IS MOVING TO LIGHT SPEED There are some actions you need to take right now to ensure you meet your customers’ emerging service expectations, says Paul Watkins.
F
our key societal trends now dominate your client’s lives – and define how you should communicate with clients. The first is that we live in a ‘connected’ world. We are rarely apart from our cellphones; they are always in our pockets or on our desks at work, when with friends, we sleep with them beside our beds and have an insatiable desire to check them for messages every minute or two. School students have been known to avoid camps if there is thought to be no cell coverage out there, fast food outlets which ban cell phones at work lose employees for that reason and schools fight an increasingly losing battle against cell phones in class. This is called ‘nomophobia’, defined as a phobia of not having your mobile phone with you or losing it. We all suffer from it to a greater or lesser extent. 30% of us suffer from phantom vibration syndrome, imagining a call or text on their phones when there isn’t one. To prove the reality of this, next time you go to
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the supermarket, try leaving your phone at home. Your heart will race, your stomach lurch and your brain will go into overdrive. I bet you can’t do it, or that you go home and get it before you get to the shop. A recent article in the Psychology Research and Behaviour Manual, suggested including nomophobia in the Diagnostic and Statistical Manual of Mental Disorders. We live on our phones. As a television commercial showed, in our pocket we carry the street view and address of every house in the entire western world, all the music every recorded, all movies reviewed and the answer to nearly any question you could ever ask. On a serious note, we do our banking through our phones, increasingly pay for things by tapping our phones and often compare prices and offers of competitor products, while standing in retail outlets. And on a slightly sinister note, we can be tracked wherever we go, our browsing history is known, firms know exactly who is searching for their products or services and virtually all our
personal information can be hacked. But we don’t seem to care about that. What this has lead to is the second trend, which is a sizable and increasing expectation of instant service. Why are emails losing ground to texts or instant messenger services? Because one survey showed that the average response time for emails was five hours, which is totally unacceptable to many now. Texts are instant, and are now the first choice for many marketers who work their lists. We hear how the so called Millennial generation (those born from 2000 onward, so aged under 37) are increasingly impatient and how it’s all about ‘me’ and ‘now’. This is real. We hate to wait for anything. Here’s a bizarre fact: When we see a video on Youtube or any other website, 45% will abandon trying to watch if it doesn’t start playing within 10 seconds and 70% will abandon it if it doesn’t start within 20 seconds. (If you use video on your website, test it for speed of start) You have probably seen the TV commercial
where a woman is in a retail store, wishing to purchase a household appliance. Through her phone, she enters a few details to get an instant credit check and a line of credit to buy a large item. I’d hate to think what the interest rate is, but access to money immediately is clearly more important than the cost of the loan. A third trend is the expectation of personalisation. We all want to be treated as the individuals that we are, and with technology, we know this is possible. Let’s say you have a list of 500 clients. If I receive an email from you, I don’t want it to read “Dear client” or “To our valued clients”, which is what many send. I want to receive “Dear (first name and first name), you arranged a mortgage through us (recently/a year ago/some time ago) and…” with each main field personalised to my circumstances. Such auto-insert emails are very easy to set up, but do reply on your client list being manged well and all relevant fields being put in place. The benefits of doing so can be huge, as a study by internet research house, Forrester Research found out. They concluded that 77% of recipients will choose, recommend, or pay more for a brand or service that provides a personalised experience. So it’s worth going to the effort of setting it up right. The fourth trend is the so called ‘YOLO’ effect. This is an acronym for "You Only Live Once". Similar to Latin ‘carpe diem’, (seize the day), it means embrace opportunities or take risks as they present themselves. Don’t wait or worry about tomorrow, it’s today that matters most. This explains to some extent the desire to buy your ‘second’ house first. Moving up over time like your parents did is a terrible idea. So how do you, as a mortgage broker, recognise these trends and act on them to your advantage? Before I give examples, you should know that NOT acting on these will put you at a disadvantage to your competitors who are increasingly working out how to. Start with the most basic of service enhancements, being client or prospect communication. Since we live on our phones, is your website mobile-friendly? If not, get it changed. It is no longer an option not to have it configured for mobile. Over 70% of all internet searches are now performed on a phone. Next, you probably email a newsletter once a quarter or perhaps more frequently. While a good base for client contact, this has to be increased. Make it short and frequent, such as just three articles, sent monthly. Use an email service like MailChimp, which automatically personalises it “Dear Martin and Mary”. Use ‘now’, rather than long term language. For example, an article headlined, “End your mortgage in 15, rather than 25 years from now”, will not get the same level of interest that one headlined, “Bring that extended European holiday a little closer.” Use text as a client communication tool. There are a good number of internet-based multi-text services available, allowing you to type it once and send it to hundreds of clients simultaneously. It also allows for high levels of personalisation, giving the impression that they are the only one who received a text from you. For example, “Hi (first name), a quick note about your mortgage with (lender),…” with as many fields interchanged as you wish. When it comes to arranging the mortgage, if you think it’s going to take two days for the lender to process, tell your client three, or you run the risk of annoying them. Keep them informed more than you do now, like daily texts or even more frequent if you think it is required. Not knowing what is happening causes stress for the client, as they want to know NOW. These are just examples of recognising the four significant trends. Write your client process down from start to finish and at each step, look to find ways to speed it up, add more to it, personalise it, make it more ‘now’ focused and with all of it – make it cellphone accessible. ✚ Paul Watkins writes blog content and newsletters for financial advisers.
027
INSURANCE By Steve Wright
When it comes to level premiums there are some not-soobvious issues to be aware of, writes Steve Wright .
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evel premiums are currently in vogue, one only has to listen to the various promises made on radio advertising. As usual though, there is more to it than simply not paying more each year for the same cover. Level premiums come with various tradeoffs, advantages and disadvantages that the compliant adviser should be aware of. In Issue 03 2015 of TMM, I discussed the relative merits of level premiums versus stepped premiums and the issues I believe advisers need to consider and disclose to their clients when making a recommendation. This time I’d like to discuss some important differences between providers’ approaches to level premiums.
IS THE LEVEL PREMIUM GUARANTEED? Level premiums for life cover are usually guaranteed, which means they can only
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be increased by the insurance company in limited circumstances, changes to law for example. Level premiums for trauma and disability covers are generally not guaranteed, which means the insurance company can increase premiums generally if increased claims exceed those expected, as has tended to happen sporadically over time. Where trauma and disability insurance premiums are guaranteed, the premiums are usually higher than equivalent non-guaranteed premiums to ensure the insurance company can bear the risk of rising claims experience where they cannot increase premiums. Clients with non-guaranteed level premium trauma and disability insurance can usually experience several premium rate increases before they pay the same premium they would for a guaranteed level premium (reach premium ‘parity’) and still more before they ‘break even’ (reach the point where the financial cost of the two level premiums to
date become equal). Another concern with guaranteed premiums may be if the insurance company can’t apply increases to premiums, they may be hesitant to apply benefit enhancements. If this happens, the policy you sold your client will begin to lag behind other policies in the market. Moving to another product, with better, more modern benefits, will then become very expensive because the client will lose the benefits of level premium (savings later on) and simply have paid far too much for the cover they had.
IS THE LEVEL PREMIUM INDEXED? For me, inflation proofing a client’s sum insured and regular benefits on claim, is critically important, particularly for personal and family cover. Inflation can decimate the value of a client’s insurance cover and benefit payments. I suspect recent low levels of inflation have made us generally complacent
about the dangers of inflation and just how destructive it can be. Inflation is easily protected against by appropriate inflation indexing. Inflation indexing automatically increases sums insured and usually monthly benefits on claim as well, by increasing these each year, automatically and regardless of the client’s health. The dangers of inflation and the necessity for protecting against it with inflation indexing, is no less important where level premiums are concerned. Be aware though, there are several issues to get to grips with and two questions in particular to ask, because insurance providers deal with level premium indexing in different ways. The first question is: what does indexing mean? What rate of increase will apply? As far as I am concerned, the minimum indexing rate required to properly protect a client is the actual real inflation rate, nothing less. This is because inflation could easily rise to double digits and beyond, no one knows what the future will hold. It is important to note that insurance companies, especially those that load the costs of indexing into the initial premium (bullet three below), may not adjust cover or benefits for the actual inflation rate. With these companies, indexing is fixed at a flat rate (for example 2%) regardless of how high inflation actually rises. While this may not be a concern with current low inflation, if inflation rises in the future these clients will not be adequately protected. When one considers New Zealand’s inflation rate was almost 6% only 10 years ago, and that at 6% inflation the value of money halves roughly every 12 years, one can clearly see how this can become a potential problem. Adequate inflation indexing may be compromised even though ‘indexing’ is selected. The second question is: How is my client charged for indexing, how do they pay for the annual increases in sum insured? There are several possibilities: ➤ The premium for the increased portion of the sum insured is charged annually and is based on current age at increase. In this case the initial premium is likely to be the same with indexing as it is without indexing. However, each annual increase in sum insured for
❝While I think advice on premium structures is important, the premium structure can never be more important than the right benefits (necessary sum insured, right benefit mix and most appropriate policy) ❞ indexing will become increasingly expensive as the client ages. Over time this can mount up. ➤ The premium for the increased portion of sum insured is charged annually and not based on current age but based on age at inception. This means the premium rate for increases is always the same as the original rate. In this case the initial premium for indexing is likely to be a bit higher than the no index option. Over time though this can add up to significant savings. ➤ The premium for the increased portion of sum insured is rolled up into the initial premium. This means no annual premium increases, which may seem appealing with level premiums but this must be contrasted with the higher premiums paid up-front and which can’t be avoided if the client chooses to decline an annual indexing increase. As mentioned above, advisers must also understand what rate applies for indexing, is it actual CPI or fixed at a particular level? These differences mean that simply comparing first year indexed level premiums is completely meaningless because the overall costs over the level premium term will differ.
WHAT HAPPENS TO INSURANCE COVER WHEN THE LEVEL PREMIUM TERM ENDS? There are a couple of different answers to this question, each to be recognized and the implications understood: ➤ Cover might end: As may be the case with products where the cover term ends anyway, like income cover or mortgage repayment cover (typically at age 65 or 70) or where a particular provider’s cover expires, like some TPD and critical illness covers, which can expire at age 65, 70 or 75. Some
life covers expire also, although more often around age 100. ➤ Cover might be reduced and reducing: At least one provider reduces the sum insured at the expiry of the level premium term, to the sum insured that the level premium amount can support on the YRT premium rate. Premiums then continue to remain the same but each year the cover reduces further. This is likely to mean an unknown and dramatic initial reduction in cover (conceivably down to less than 10% of sum insured) and then ongoing reductions over time. ➤ Cover might continue at the same level: Cover continues after the end of the level premium term but at YRT premium rates. Naturally one would expect the premiums to rise considerably on YRT rates but clients do get the choice to continue with cover if they need it or reduce cover to reduce premiums as suits them. These matters need to be considered and understood before a recommendation is made because with level premiums, switching later to a more appropriate level premium product to get the appropriate and most efficient product can be very costly in the long term. While I think advice on premium structures is important, the premium structure can never be more important than the right benefits (necessary sum insured, right benefit mix and most appropriate policy) because at claim time, which is why we have insurance in the first place, the wrong product, provider or level of cover, can never be put right by the premium structure chosen. ✚ Steve Wright is general manager Product at Partners Life.
029
MY BUSINESS By Miriam Bell
Future calculations An emphasis on putting clients first and a love of number crunching means that Julia Clark, of Black Label Mortgages, feels confident about the industry changes ahead. HOW DID YOU GET INTO MORTGAGE ADVISING? My sister and I got into property investing and were disappointed with the mortgage adviser we worked with initially. So when the opportunity came up to move into the industry, I thought YES – I love property and I have a background working with numbers. I was keen to understand that side of the property picture, so it felt like a natural fit.
WHAT DREW YOU TO THE INDUSTRY? When buying investment properties, we didn't have very good experiences with the brokers we worked with and I really felt limited by my lack of knowledge of how the funding side of things worked. I felt we had to just blindly trust those we were working with, and were then let down. So I guess you could say it was my desire to understand the industry better for myself, and also to improve on the level of service I had received.
WHICH ASPECT OF THE JOB DO YOU ENJOY THE MOST? I love the submission process, working out how to best present the deal to the lenders to achieve the desired outcome. Numbers have always been something I've enjoyed working with and, while I enjoy the relationship side of the work, I'm really most comfortable behind my desk with a spreadsheet in front of me!
HOW DID YOU EDUCATE YOURSELF AROUND THE BUSINESS? The original idea was that I would work under a mentor while I got up to speed with the industry. But that didn't eventuate so it came down to making sure I understood the client’s situation clearly, and then bouncing potential
solutions off the various (and mostly amazing) business development managers. So often, even now, it comes down to knowing where to get answers from, and as time goes on, you develop the experience to draw on. I could have saved a lot of time and gained a huge amount of support from others in the industry if I had connected earlier, and that is generally the approach I take when faced with a new situation now.
DO YOU THINK IT’S A GOOD TIME TO BE A MORTGAGE ADVISER? I believe it is and this is all about perspective. They say the only difference between a stumbling block and a stepping stone is perspective. There are big changes ahead and I'm looking forward to the opportunities that will come with that. There are always people who focus on the negative and there's usually at least one of them who is quite vocal. I don't think the industry would be worse off if they decided the changes ahead are too much for them.
YOU DON'T USE THE WORD “BROKER”, WHY IS THIS? I've never liked the word. I've always lumped it in with '’used car salesman'’ slick backed hair, snake skin shoes, gold fillings. Not fair on either industry I know. But I'm not the only one. I've found that even in a social setting, if I say I'm a '’broker’' they start looking for escape routes. Our industry has so much to offer, and if using a different job title stops people putting a barrier up long enough for them to understand the value we offer, then that's great.
WHAT ARE SOME KEY CHALLENGES RIGHT NOW? My main challenge is always getting clients. Targeting the right people, with the right message, using the right communication avenue is defiantly an area that I need to focus more on and get the right people in to assist with. From speaking to others, I don't believe I'm an outlier with this, but I do get frustrated quite quickly when I don't get immediate results from marketing activities. Turns out relationships take time to build and become fruitful! So working on perseverance is quite high up on the list of things to improve as well. Working from a home base, discipline is something I find challenging as well, and that flows on to productivity (or lack of!).
ARE YOU DAYS STRUCTURED OR DO YOU WORK MORE FLEXIBLY? Structure. That would be nice! My mind seems programmed to sabotage any attempt at that! I work extremely flexibly at the moment. I usually work off a to-do list to keep track of things, but flexibility is something I value, and clients expect that to a certain extent. I need to be able to talk to a nervous client for half an hour at the drop of a hat, or be able to push half a day's work to prioritise for an urgent application. I also live with a chronic illness that sometimes gets in the way of the best laid plans. So my days are approached with flexibility.
WHERE WOULD YOU LIKE TO SEE BLACK LABEL POSITIONED IN THE FUTURE? My goal is to provide outstanding service to my clients. I believe the future of Black Label is entirely dependent on our clients’ experience and if we focus on that, the future will take care of itself. To bring on like-minded advisers when appropriate, and to expand the services offered to improve the client experience is part of that plan.
DO YOU HAVE A 10-YEAR PLAN? Short answer? No. I don't have the attention span for 10 years! And to be honest, I don't understand the value of planning that far in advance. The plan we do have is really simple: 1) Client first every time and 2) Sustainable practice, target income. We also have a background goal of attending the Rugby World Cup in Japan, which is tied in with number 2! Black Label is small - although it's growing – but at the moment it’s a small practice. As we get larger I'm sure someone will explain the importance of this sort of thing, but my focus is to do what I do well as an adviser, day in and day out. We do have some time set aside to identify and document key goals for the next one to three years over the Dec/Jan period.
HOW IMPORTANT IS SOCIAL MEDIA FOR YOUR BUSINESS? Social Media: it’s an interesting area. I believe it’s important, and that we are not utilising it as we should yet. To balance that though, I don't believe it’s the answer to everyone's prayers as many seem to think it is. Social media is massive, but as its use explodes over various platforms, we are also getting extremely good at filtering out noise. A successful social media campaign requires time, energy, a clear message that is reinforced over multiple platforms in many different ways. And the reality is that most advisers in this industry just don't have the time or skills to do that. Our approach is to work back from the audience to develop a relevant and highly targeted campaign including various types of content. We need to have at least six months of posts planned ahead to make sure we can build things sustainably. We are currently working with various contractors on this and plan to kick things off in the new year. It's a lot of work, but we would much rather do it well.
HOW DO YOU THINK THE CHANGES TO FINANCIAL ADVISER REGULATIONS WILL IMPACT YOUR BUSINESS? I'm really hoping that it sees a reduction in the number of advisers, and an improved public perception of the industry. We see it as a time to build and strengthen our position, and the financial services industry as a whole benefiting from it. I'm sure there will be a bit of discomfort during the process, but that goes hand in hand with growth. ✚
Q&A What’s your favourite film? Big fan of the James Bond franchise
What sort of car do you drive? Mazda 6 Wagon, plenty of room for the dogs & toys!
What’s your life motto? Nothing very specific – but along the lines of – no one’s qualified to be an adult, were all just trying to figure it out as we go
What’s one thing you can’t live without? Insulin! – I have type 1 diabetes
What’s your favourite meal? Can’t beat a nice piece of steak!
Do you have any pets? my husband and I have a dog – Kelpie cross called Tahi, and we also are fostering a Beagle cross puppy for the Ministry of Primary industries called Hattie – she goes to start her training as a sniffer dog in January
What’s your ideal Saturday morning? Sleep in, then out for breakfast/brunch followed by coffee!
What do you do when you’re not working? Family is quite important to me, so spending time with them. Love DIY as well, and with a number of rental properties theres always some work that needs doing! Travel, and the trappings of living in Auckland such as art galleries, restaurants, and festivals are always a draw.
What’s the best holiday you’ve ever had? in 2012 my Husband and I spent 12 weeks in Europe – great trip! But as for a spot to just relax, can’t beat Samoa!
031
LEGAL By Jonathan Flaws
Reflectio
With the future uncertain Jonathan Flaws investigates whether looking back will help us to ascertain what’s next for New Zealand’s housing market.
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e are currently at a time of historically low interest rates. We have a new government that wants to make changes, particularly in the housing sector so that the rite of passage – owning your own home – can become attainable. When change occurs, it is not easy to read the future and understand what effect the changes will make. It is always easier to look back and reflect on the effect that changes
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over the years have made. Perhaps by doing so we can learn from the past. Perhaps not. But reflections will always be interesting. When I started in law, the financial markets, especially the banks, were regulated. The government was well entrenched in the housing market. Apart from the provision of government housing, the State Advances Corporation was a large, if not main source of funding for the quarter acre pavlova paradise. Building societies, insurance companies, savings banks and solicitors nominee
companies were also major players. The trading banks were required by law to limit their involvement in housing lending and housing loans. Most law firms had large conveyancing practices which were often driven off the back of their nominee companies. The nominee companies were contributory mortgage schemes. Originally moneys from estates and private clients was put into specific mortgages that were between three to five years fixed interest-only loans. The LVRs were never higher
ons than 66% so second mortgages at higher rates were common. A young couple buying their first house would happily raise the funds to buy while also maintaining their deposit in a terminating building society or savings bank and hoping that, in the case of the building society, they would win a ballot and be entitled to borrow on a long term mortgage. An application for long term funding from the State Advances Corporation was often associated with the purchase of a house from
the State. Sometimes the State would sell on a long term agreement for sale and purchase that created a registered interest at the land registry. Instead of taking a mortgage, the freehold land was owned by the State and the lending was made through the a long term agreement for sale and purchase. The solicitors’ mortgages started by recording the contributors as co-mortgagees. This became cumbersome so solicitors formed a nominee company that held the mortgage on behalf of all contributors. Using this method, it became possible to replace contributors if a contributor needed their investment repaid early. The Law Society developed a set of rules regulating how lawyers should manage nominee companies and contributory mortgages. They should have been safe and contributors' investments should have been protected by these professional self imposed regulations. But they were not always followed properly and there were some large issues when some lawyers did not always obtain the right authorities from their clients to invest or choose their borrowers wisely or provide sufficient information to allow the contributors to assess the investment. With the change of Government in 1984 and the deregulation of the financial markets, the establishment of the Reserve Bank Act that followed, the changes to the mortgage market were significant. The State ceased to lend on mortgages, the Building Societies changed their mode of operation and either merged or became registered banks and many law firms closed down their nominee companies and relied less on conveyancing fees. The distinction between trading and savings banks ended with the savings banks merging (except for the Auckland Savings Bank) and then becoming full commercial banks in their own right. Banks entered the he mortgage market. They persuaded lenders to direct clients to them by offering to instruct the lawyer to act for both borrower and lender. Home loans for long terms became easier for the home buyer to obtain and second mortgages became things you took out once your home loan to the bank had reduced and you wanted to borrow money on your home for other purposes. Following the 1987 crash, investment in the share market became less attractive and the trend to owning multiple investment properties increased. The mortgage market moved to where it is today with the large banks holding the vast majority of home mortgages.
❝Following
the 1987 crash, investment in the share market became less attractive and the trend to owning multiple investment properties increased. ❞ In more recent times, the mortgage broking industry developed. Regulation was progressively introduced to control the financial markets. Private contributory mortgages had their own set of regulations which came and then went. And the housing market expanded to the point where it has become extremely hard for young couples to buy their first home. Government assistance to purchase is non-existent. Lawyers nominee companies do not exist in their own regime but lawyers can still run a scheme provided they follow the same requirements under the Financial Markets Conduct Act as any other financial institution. The new Government has already taken steps to try and control the housing market and make home ownership feasible again. Whether this will be achieved has yet to be seen. Restricting foreign home ownership and asking the Reserve Bank to tighten lending restrictions on residential investment loans may have some effect. Reflecting on the past developments in the mortgage market suggests to me that it is likely that sources of home mortgages will develop and claim a greater share of the market. Whether these will resemble the sources of the past is unknown and perhaps unlikely. Certainly it is hard to see the Government wanting to participate as a lender like the State Advances Corporation of the past – or is it? ✚ Jonathan Flaws is a partner at legal firm Sanderson Weir.
033
Intelligence
COMPARING BANK LOAN BOOKS Three of the big banks recently reported their annual results including a breakdown of their loan books.
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NZ, BNZ and Westpac reported their annual results since the previous issue of TMM. Two of them, ANZ and BNZ also provide a good look inside their residential lending books. TMM requested the same information from Westpac, however the bank claimed the information was commerically sensitive, although they do provide it for their Australian operations. In the following tables we have created templates to show lending on a like-for-like basis and included the changes from the previous financial year.
Total Loan Book Variable Rate Fixed rate Line of credit
SEP-16 $73 bill 24% 76%
SEP-17 $77 bill
CHANGE 5.00%
21% 79%
-346bps 346bps
65% 35%
90bps
73% 27%
72bps -72bps
BY PRODUCT
BY CHANNEL Proprietary Adviser
66% 34% BY BORROWER TYPE
Owner-occupied Investor
73% 27%
Interest only LVR at origination Current LVR Average loan size
24% 60% 44% $143,000
22% 59% 43% $148,000
-154bps -108bps -106bps 3.30%
Total Loan Book
SEP-16 $35.1 bill
SEP-17 $37.4 bill
CHANGE +6.55%
20.4% 76.9% 2.7%
nc +30bps
LOAN DETAILS
Variable Rate Fixed rate Line of credit
20.4% 76.7% 2.9%
BY PRODUCT
BY CHANNEL Proprietary Adviser Owner-occupied Investor Interest only LVR at origination Current LVR Average loan size
94.4% 5.6%
89.0% 11.0% BY BORROWER TYPE 60.4% 63.4% 39.6% 36.6% LOAN DETAILS 25.1% 23.9% 67.8% 66.3% 62.6% 61.0% $159,000 $165,000
-320bps +540bps +306bps -300bps -120bps -150bps -160bps +3.77%
2018 IS LIKELY TO BE A YEAR OF CHANGE FOR PROPERTY. MAKE SURE YOU AND YOUR CLIENTS ARE THE FIRST TO KNOW.
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