Mortgages in Australia 2008

Introduction
The Australian mortgage market is facing a number of internal and external challenges. Record low housing affordability is pressuring mortgagors, and the global credit crisis has increased funding costs for lenders. This report puts the current situation in its historical perspective, describes current trends in the market, and analyzes potential future developments.

Report Highlights
Highlights
The turbulence in international credit markets has led to increased funding costs for Australian lenders. This has caused several of the Australian banks to revise their estimates of profitability for the next year downwards, and to raise their rates.

A higher degree of leverage for mortgagors may be a cause for concern in the event of a market downturn. Rising interest rates combined with falling property prices would leave some mortgagors overcommitted, especially if the mortgage was taken out with the expectation of refinancing.

The internet has already altered the way that mortgages are researched, as it has become very common for prospective mortgagors to compare prices and features from different lenders online. Actually applying for a mortgage over the internet is as yet quite uncommon, as consumers often desire face-to-face contact for such important decisions.
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TABLE OF CONTENTS
Overview 1
Catalyst 1
Summary 1
Executive Summary 2
Market Context 2
Illiquid global credit markets and record low Australian housing affordability threaten the market 2
Customer Focus 3
Product Focus 5
Competitive Dynamics 6
CBA is the largest lender with outstanding loans of A$172 billion 7
ANZ currently is the major bank with the highest proportion of satisfied mortgagors 8
Future Focus 9
Lending commitments will reach an estimated A$349 billion by 2012 10
Table of Contents 11
Table of figures 12
Table of tables 13
Market Context 14
The Australian mortgage market has grown strongly over the last two decades 14
Housing credit aggregates reached A$909 billion in 2007 14
Housing credit per adult Australian exceeded A$54,000 in 2007 15
Australian mortgagors have become more leveraged 16
Property investing has helped fuel the growth of housing credit aggregates 17
Lending commitments amounted to A$263 billion in 2007 19
The proportion of lending commitments attributable to investors has risen since 1993 21
Refinancing has become more common in the Australian mortgage market 22
First time buyers are continuing their tentative return to the market 23
Lending commitments for new construction have not kept up with lending for existing properties 24
The Australian mortgage market faces internal and external challenges 27
Property prices have grown strongly, especially in major cities 27
House price growth has been especially strong in Perth 29
Rising property prices have priced many Australians out of the market 30
Rising interest rates have exacerbated the already difficult housing situation 30
The cash rate target has risen 12 consecutive times since 2001 31
Industry observers widely believe the cash rate target will increase further in 2008 31
The threat of rising interest rates has revived interest in fixed rate loans 32
Adverse global credit conditions have recently impacted on the Australian mortgage market 33
The global credit crunch has affected banks and non-bank lenders alike 33
Increasing lender funding costs will lead to rising mortgage rates 34
Customer Focus 35
Record low affordability threatens Australian mortgagors 35
Many Australian mortgagors are under financial stress 35
Getting on the property ladder is considered an impossibility by an increasing number of people 36
Australian mortgagors often refinance to achieve the best rate 37
The average mortgage is now only held for four to seven years 37
Refinancing strategies can be risky in the face of adverse market conditions 38
Attitudes towards home ownership are changing 39
Traditionally home ownership has been an integral part of the ""Australian Dream"" 39
The younger generation's attitudes differ from their elders' 39
Product Focus 41
Mortgage products have evolved and become more diversified 41
Mortgages now offer more features and options 41
Low deposit products have become very common 41
Low documentation products cater to those who can not provide proof of income 42
Longer loan terms have been introduced but are not yet popular 43
New mortgage products have entered the market 44
Mortgage packages have entered the mainstream and are openly advertised 44
Private market shared equity mortgages were recently introduced 45
Reverse mortgages have become more common but are still a small niche product 46
Competitive Dynamics 48
Pricing has been subjected to considerable competitive pressure in Australia 48
Non-bank lenders challenged the banks in the 1990s 48
Foreign lenders have recently had success in the Australian market 50
Average loan margins have steadily shrunk as a result of competition 51
Banks have recently won back market share from non-bank lenders 53
Unfavorable global credit markets have disproportionately affected non-bank lenders 53
Borrowers have responded to uncertain market conditions by returning to brands perceived as safe 54
Channels to market are the focus of strategic shifts 56
The branch channel competes with the mortgage broker channel 56
The mortgage broker channel faces its own unique challenges 56
National legislation is expected to be introduced in 2008 56
Many brokers are looking to diversify their product range 56
CBA is still the largest Australian lender in a fragmented market 57
CBA is the largest lender with outstanding loans of A$172 billion 57
New entrants are threatening incumbents with rapid growth 60
The five largest banks hold around two thirds of outstanding mortgages 61
ANZ currently is the major bank with the highest proportion of satisfied mortgagors 62
Credit unions and building societies are squeezed by increasing competition 63
Specialist mortgage lenders are riding out the storm 64
The proportion of outstanding mortgages attributable to securitization vehicles has recently fallen 65
Future Focus 66
Mortgage products will continue to evolve 66
There will be demand for products offering better affordability 66
Product convenience will increase 66
In the long term the internet has the potential to revolutionize the mortgage market 67
Customized mortgages are a way to serve niche customers 69
Government initiatives may change the playing field 69
The new Australian government has promised to tackle housing affordability 69
A recent government initiative will introduce tax-exempt savings vehicles for prospective first home buyers 69
The First Home Saver Account scheme has attracted some criticism 70
Lending commitments will reach an estimated A$349 billion by 2012 under the neutral view 71
Datamonitor's forecasting methodology of lending commitments consider both macroeconomic and soft factors 71
APPENDIX 74
Supplementary data 74
Definitions 101
Balances outstanding 101
CAGR 101
Cash rate target 101
Gross advances 102
Lending commitments 102
Mortgage manager 102
Mortgage offset account 102
Non-conforming 102
Tranches 102
Methodology 102
Further reading 102
Ask the analyst 103
Datamonitor consulting 103
Disclaimer 103
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LIST OF TABLES
Table 1: Top 15 bank lenders in Australia 8
Table 2: Monthly repayments are reduced with longer loan terms 44
Table 3: Top 15 bank lenders in Australia 60
Table 4: Government contributions will be higher for higher tax rates 70
Table 5: Credit aggregates in Australia, 1994-2007 74
Table 6: Debt to assets ratio, 1993-2007 75
Table 7: Housing credit aggregates per Australian adult, 1993-2007 76
Table 8: Outstanding owner-occupier loans and investor loans, 1993-2007 77
Table 9: Owner-occupier and investor lending commitments, 1993-2007 78
Table 10: Refinancing as a proportion of monthly owner-occupier lending commitments, 1993-2007 79
Table 11: First time buyer proportion of owner-occupier dwellings financed, 1993-2007 80
Table 12: Construction and existing dwellings lending commitments, 1993-2007 81
Table 13: Monthly building approvals for all dwellings, 1993-2007 82
Table 14: Average monthly sales prices of owner-occupier established dwellings, 1993-2007 83
Table 15: Quarterly property price index of established homes in the eight capital cities, 2003-07 84
Table 16: Quarterly house price index for Sydney, Melbourne and Perth, 2003-07 85
Table 17: Cash rate target, 1993-2008 86
Table 18: Fixed rate proportion of owner-occupier dwellings financed, 1993-2007 87
Table 19: Some groups of mortgagors are more likely to be stressed than others 87
Table 20: Interest payments to disposable income, 1993-2007 88
Table 21: How difficult do you think it would be for you to keep up repayments on a mortgage for the next five years? 89
Table 22: How long did you keep your mortgage with your previous mortgage provider and how long do you expect to keep your mortgage with your current mortgage provider? 89
Table 23: Owner-occupier proportion of private dwellings, 1996-2007 89
Table 24: Attitudes towards home ownership and risk differ between age groups 90
Table 25: How much deposit did you have when you got your main mortgage? 90
Table 26: What would make you bundle different financial products with a single provider? 90
Table 27: Bank and non-bank owner-occupier lending commitments, 1993-2007 91
Table 28: The value of outstanding securitized residential loans, 1993-2007 92
Table 29: Outstanding mortgages for a sample of foreign banks, 2002-07 93
Table 30: Margin of standard bank rate over cash rate target, 1993-2007 94
Table 31: Margins of banks' and mortgage managers' loans over the cash rate target, 2004-07 95
Table 32: RAMS stock price, 2007-08 96
Table 33: Australian consumers have come to strongly prefer major domestic brands 97
Table 34: Total value of outstanding mortgages for the top ten Australian bank lenders, January 2008 97
Table 35: Market share of outstanding mortgages for the top ten Australian mortgage lenders, January 2008 98
Table 36: Proportion of mortgagors that are very or quite satisfied for a sample of major lenders, 2007 98
Table 37: Credit unions and building societies outstanding mortgages, 2002-07 99
Table 38: Securitization split by banks and building societies/credit unions, 2002-07 100
Table 39: How did you arrange your financial product and how would you like to arrange your financial product? 101
Table 40: Forecasts of yearly lending commitments according to different scenarios, 2008-12 101
LIST OF FIGURES
Figure 1: Credit aggregates in Australia have grown strongly since 1994, 1994-2008 2
Figure 2: Interest payments to disposable income has increased since 1993, 1993-2007 3
Figure 3: Some groups of mortgagors are more likely to be stressed than others 4
Figure 4: Attitudes towards home ownership and risk differ between age groups 5
Figure 5: Low deposit products have become common in the Australian mortgage market 6
Figure 6: ANZ has the highest proportion of satisfied mortgagors 9
Figure 7: Growth in lending commitments varies according to underlying assumptions, 2007-12 10
Figure 8: Credit aggregates in Australia have grown strongly since 1994, 1994-2008 15
Figure 9: Housing credit aggregates per Australian adult reached A$54,000 in 2007 16
Figure 10: Australian mortgagors have become much more leveraged, 1993-2007 17
Figure 11: The investor proportion of outstanding bank loans has increased, 1993-2007 18
Figure 12: In recent years the owner-occupier proportion of outstanding bank loans has increased slightly, 2002-07 19
Figure 13: Lending commitments have grown strongly since 1993, 1993-2007 20
Figure 14: Owner-occupier lending commitments have grown faster than investor lending commitments over the last five years, 2003-07 21
Figure 15: Investor proportion of monthly lending commitments has increased since 1993, 1993-2007 22
Figure 16: Refinancing as a proportion of monthly owner-occupier lending commitments has increased over the last 15 years, 1993-2007 23
Figure 17: First time buyers are making a comeback since the March 2004 low point, 1993-2007 24
Figure 18: Monthly lending commitments for construction have grown at a slower pace than lending for existing dwellings, 1993-2007 25
Figure 19: Lending for construction has fallen as a proportion of monthly lending commitments, 1993-2007 26
Figure 20: Monthly building approvals have not risen since 1993, 1993-2007 27
Figure 21: Average monthly sales prices of owner-occupier established dwellings have risen since 1993, 1993-2007 28
Figure 22: The quarterly property price index of established homes in the eight capital cities has started to accelerate since September 2005, 2003-07 29
Figure 23: Property prices have grown strongly in Perth, 2003-07 30
Figure 24: The cash rate target has been rising since 2001, 1993-2008 31
Figure 25: The fixed rate proportion of owner-occupier dwellings financed has increased since 2001, 1993-2007 32
Figure 26: Some groups of mortgagors are more likely to be stressed than others 35
Figure 27: Interest payments to disposable income has increased since 1993, 1993-2007 36
Figure 28: Non-mortgagors would find it hard to afford mortgage payments 37
Figure 29: Many mortgagors expect to refinance within a short time period 38
Figure 30: Owner-occupier proportion of private dwellings has been stable over the long term, 1966-2007 39
Figure 31: Attitudes towards home ownership and risk differ between age groups 40
Figure 32: Low deposit products have become common in the Australian mortgage market 42
Figure 33: Longer loan terms lead to higher total interest costs 43
Figure 34: Reducing fees is an important reason for bundling 45
Figure 35: Reverse mortgages are paid back with interest at the conclusion of the mortgage 46
Figure 36: Non-banks proportion of owner-occupier lending commitments has increased, 1993-2007 49
Figure 37: The value of outstanding securitized residential loans has skyrocketed, 1993-2007 50
Figure 38: Foreign banks have had success in the Australian mortgage market, 2002-07 51
Figure 39: Average interest margins have fallen since 1993, 1993-2007 52
Figure 40: Banks' discounted rates have lower margins than the standard rate, 2004-07 53
Figure 41: RAMS' share price has tumbled since the IPO in July 2007, 2007-08 54
Figure 42: Australian consumers have come to strongly prefer major domestic brands 55
Figure 43: CBA is the largest Australian lender with outstanding mortgages worth A$172 billion, Jan-08 58
Figure 44: CBA has captured the largest proportion of the growth in outstanding bank balances, 2007 59
Figure 45: Bank of Queensland grew its outstanding mortgage balances by 32% in 2007 61
Figure 46: The five largest banks account for around two thirds of outstanding mortgages, Jan-08 62
Figure 47: ANZ has the highest proportion of satisfied mortgagors 63
Figure 48: The proportion of mortgages attributable to credit unions and building societies has fallen, 2002-07 64
Figure 49: Securitization reached a peak in June 2007 and has fallen off since, 2002-07 65
Figure 50: More people would like to arrange financial products online than actually do 68
Figure 51: Under the Neutral scenario, yearly lending commitments are expected to reach A$349 billion by 2012, 1993-2012 72
Figure 52: Growth in lending commitments varies according to underlying assumptions, 2007-12 73
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