Mortgages in Australia

Introduction

The Australian mortgage market has tentatively started to recover from the effects of the global financial crisis. Lending commitments have bounced back after a sharp fall in 2008, largely based on unusually high first time buyer activity. This report puts the current situation in its historical perspective, describes current trends in the market, and analyzes future developments.

Scope

*Includes a comprehensive overview of the Australian residential mortgage market.

*Draws upon a large Datamonitor consumer survey to gain insights into the current mindset of the Australian mortgagor.

*Includes market overview, analysis of competitors and outline of future developments.

*Provides three scenario forecasts for lending commitments in Australia until 2013.

Highlights

Lending commitments have grown strongly over the last ten years, but dipped in the first half of 2008. In July 2000 lending commitments of A$7.5 billion were granted, and in July 2009 A$22.5 billion of lending commitments were granted, representing a CAGR of 12.9% over the period.

First home buyer activity has surged as a result of government subsidies and a low interest rate environment. The absence of non-bank lenders and a consumer preference for the perceived safety of large domestic banks led to opportunities for the largest four banks.

Satisfaction levels have converged between different financial institutions in the last year. In both 2008 and 2009, NAB was the lowest rated bank in terms of proportion of quite or very satisfied mortgagors, and ANZ was the highest rated, but the difference between the institutions was greater in 2008.

Reasons to Purchase

*Plan your future strategy with confidence using Datamonitor's scenario-based forecasts of Australian lending commitments until 2013.

*Understand the challenges the mortgage industry is facing, as well as the opportunities, at this pivotal time.

*In-depth analysis of how Australian providers approach different issues, allowing you to reassess your strategy.


Report Highlights
Lending commitments have grown strongly over the last ten years, but dipped in the first half of 2008. In July 2000 lending commitments of A$7.5 billion were granted, and in July 2009 A$22.5 billion of lending commitments were granted, representing a CAGR of 12.9% over the period.

First home buyer activity has surged as a result of government subsidies and a low interest rate environment. The absence of non-bank lenders and a consumer preference for the perceived safety of large domestic banks led to opportunities for the largest four banks.

Satisfaction levels have converged between different financial institutions in the last year. In both 2008 and 2009, NAB was the lowest rated bank in terms of proportion of quite or very satisfied mortgagors, and ANZ was the highest rated, but the difference between the institutions was greater in 2008.
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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
Market sizing and key issues 2
The Australian mortgage market has grown strongly over the last decade 2
Housing credit aggregates and lending commitments have grown rapidly 2
Housing leverage has increased 2
Property prices have risen and converged between state capitals 2
Household mortgage fees yield over A$1 billion for Australian banks 2
Mortgage lending is forecasted to grow to A$353 billion by 2013 3
First time buyers have become a yet more important customer segment 3
First time buyers have propped up the mortgage market 3
Investor market activity has abated somewhat since its 2003 peak 3
Refinancing activity has stabilized after a long period of growth 3
Fixed rates are primarily used as a form of insurance 4
Interest rates have fallen since their 2008 peak 4
Average fixed rates exceed average standard rates as the markets expect a rising cash rate 4
Mortgagors are more likely to fix their mortgage rate when interest rates are high 4
Competitor market shares and developments 5
CBA and Westpac have tightened their grip on the mortgage market 5
Each major banks' mortgage customers have distinct attributes 7
NAB customers are more likely to have investment properties and several mortgages 7
St.George has a strong presence in basic mortgages 7
ANZ customers are more likely to have used a mortgage broker 8
CBA has the highest proportion of new mortgagors 8
Westpac customers are the most likely to expect to keep their provider long-term going forward 8
The interest rate is a prime driver of customer acquisition 8
The global financial crisis has made pricing more important for a range of financial products 8
ANZ customers are especially likely to have chosen their mortgage based on rates 8
St.George customers are the most likely to have a fixed rate loan 9
Mortgage stress is common for Australian mortgagors despite low default rates 9
ANZ customers are the most likely to express currently experiencing mortgage stress 9
ANZ customers are the most likely to have had a significant deposit 9
CBA customers are the most likely to expect future mortgage payments to become difficult 9
Customers of ANZ and CBA are the most likely to have cut back on spending on luxury items 10
Satisfaction with mortgage providers has fallen and converged between providers 10
Customer acquisition and retention strategies 11
Mortgage innovation is slowly picking up in the Australian market 11
Bankwest has launched a capped rate product 11
ING DIRECT is launching a new product through the broker channel 11
Macquarie Bank is considering reentering the market 11
There is room for further innovation in Australia based on UK experiences 11
Mortgage brokers and the internet channel will continue to grow in importance 11
The broker channel will be a key focus for incumbents and new entrants alike 11
The internet channel will continue to slowly grow in importance 12
Institutions need to provide a smooth and seamless customer experience 12
The backlog of mortgage applications has highlighted the importance of turnaround times 12
Multiple products held with the same institution can offer both advantages and disadvantages 13
Increasing competition will ensure pricing remains a key aspect driving consumer choice 13
Table of Contents 14
Table of figures 15
Table of tables 16
Market Sizing and Key Issues 17
The Australian mortgage market has grown strongly over the last decade 17
Outstanding housing credit now exceeds A$1 trillion 17
Outstanding credit has continued to grow in the last two years despite an uncertain economic environment 19
Lending commitments have grown over the last decade but fell in early 2008 20
Lending commitments bounced back in early 2009 as a result of strong first time buyer demand 21
Housing leverage has increased 22
Property prices have risen and converged between state capitals 25
Household mortgage fees yield over A$1 billion for Australian banks 27
Mortgage lending is forecasted to grow to A$331 billion by 2013 28
First time buyers have become a yet more important customer segment 30
First time buyers have propped up the mortgage market 30
Investor market activity has abated somewhat since its 2003 peak 31
Refinancing activity has stabilized after a long period of growth 33
Most mortgagors expect to keep their mortgage with their current provider for 10 years or more 34
Most mortgagors had over 10% deposit when taking out their main mortgage 36
Fixed rates are primarily used as a form of insurance 38
Interest rates have fallen since their 2008 peak 38
Average fixed rates exceed average standard rates as the markets expect a rising cash rate 39
Mortgagors are more likely to fix their mortgage rate when interest rates are high 40
Most mortgagors have a variable rate 40
The fixed rate proportion of lending commitments reached a high in March 2008 41
Mortgagors tend to fix their rate at the worst times 42
Competitor Market Shares and Developments 45
CBA and Westpac have tightened their grip on the mortgage market 45
CBA continues its dominance as the largest individual brand for mortgages 45
CBA and Westpac combined hold a 46% market share of outstanding Australian mortgages 46
CBA and Westpac have had success with the first home buyer segment by providing perceived security 48
Each major banks' mortgage customers have distinct attributes 49
NAB customers are more likely to have investment properties and several mortgages 49
NAB customers are more likely to have higher value main mortgages 51
St.George has a strong presence in basic mortgages 51
St.George mortgagors have the lowest average current mortgage size 52
St.George mortgagors have the lowest average original mortgage size 53
ANZ customers are more likely to have used a mortgage broker 54
CBA has the highest proportion of new mortgagors 57
Westpac customers perceive themselves as more loyal 58
NAB has effectively cross-sold other financial products to its mortgage customers 59
Perceived safety affects cross-selling and choice of rate type 60
CBA and NAB customers are especially likely to have several different products with the institution 60
NAB mortgagors are the most likely to hold several product types at NAB 63
CBA has benefitted from cross-selling mortgages to transaction account customers 64
St.George customers are the most likely to have a fixed rate loan 65
Mortgage stress is relatively common for Australian mortgagors despite low default rates 66
ANZ customers are the most likely to express currently experiencing mortgage stress 66
ANZ customers are the most likely to have had a significant deposit 67
CBA customers are the most likely to expect future mortgage payments to become difficult 69
44% of ANZ mortgagors claim to have cut back on luxury spending to afford their mortgage 70
ANZ mortgagors are more likely to incur further debt and look to sell property 71
Satisfaction with mortgage providers has fallen and converged between providers 72
Customer Acquisition and Retention Strategies 76
Institutions need to provide a smooth and seamless customer experience 76
The backlog of mortgage applications has highlighted the importance of turnaround times 76
Multiple products held with the same institution can offer both advantages and disadvantages 76
Increasing competition will ensure pricing remains a key aspect driving consumer choice 77
Mortgage innovation is slowly picking up in the Australian market 77
Bankwest has launched a capped rate product 77
ING DIRECT is launching a new offset product through the broker channel 78
Macquarie Bank is considering reentering the market 78
There is room for further innovation in Australia based on UK experiences 78
The HSBC RateMatcher is an innovative overseas product 79
Nationwide's "Switch and Fix" offers the option to eventually fix the rate 80
Sale-and-rent-back products could assist borrowers who are unable to meet mortgage payments 81
Mortgage brokers and the internet channel will continue to grow in importance 82
The broker channel will be a key focus for incumbents and new entrants alike 82
Mortgage brokers are used by 40% of mortgagors 82
Mortgage brokers will continue being a key channel as market competition heats up 83
The internet channel will continue to slowly grow in importance 84
The internet is commonly used for research by mortgage customers 84
The internet channel has suffered a setback from the financial crisis 84
The internet channel will rebound from recent setbacks 85
The internet channel will grow more slowly for mortgages than for other financial products 86
APPENDIX 89
Supplementary data 89
Definitions 117
Balances outstanding 117
CAGR 117
Cash rate target 117
Gross advances 117
Lending commitments 117
Mortgage manager 118
Mortgage offset account 118
Non-conforming 118
Methodology 118
Further reading 118
Ask the analyst 118
Datamonitor consulting 118
Disclaimer 119
List of Tables
Table 1: Outstanding housing loans on the books of banks, August 2009 6
Table 2: Outstanding housing loans on the books of banks, August 2009 45
Table 3: Cross-selling to mortgage customers, April 2009 60
Table 4: CBA customers are the most likely to have different financial products with CBA, April 2009 61
Table 5: Cross-selling to mortgage customers, April 2009 77
Table 6: Fixed rate schedule for different combinations of LTV and loan fixed term at Nationwide 80
Table 7: Fixed rate schedule for mortgages with a two year fixed rate at Nationwide 81
Table 8: Household credit aggregates, January 2000-July 2009 89
Table 9: Housing credit aggregates, January 2000-July 2009 90
Table 10: Monthly housing lending commitments, January 2000-July 2009 91
Table 11: Total housing debt to housing asset ratio, March 2000-March 2009 92
Table 12: Aggregate interest payments to income ratio, March 2000-June 2009 93
Table 13: Monthly amount paid on main mortgage, April 2009 93
Table 14: Price index of established homes in the capital cities, March 2004-June 2009 94
Table 15: Median price of established house transfers in five capital cities, March 2004-December 2008 95
Table 16: Bank mortgage fees from households, 2000-2008 96
Table 17: Housing lending commitment forecasts, 2000-2013f 96
Table 18: First time buyer proportion of owner-occupier lending commitments, January 2000-July 2009 97
Table 19: Monthly lending commitments, January 2000-July 2009 98
Table 20: Investor proportion of lending, January 2000-July 2009 99
Table 21: Refinancing as a proportion of owner-occupier lending commitments, January 2000-July 2009 100
Table 22: Time held main mortgage with current mortgage provider, April 2009 101
Table 23: Time mortgage is expected to be held with current provider, April 2009 101
Table 24: Deposit when taking out main mortgage, April 2009 101
Table 25: Source of deposit for main mortgage, April 2009 102
Table 26: Cash rate target, January 2000-October 2009 103
Table 27: Average bank mortgage rates, January 2004-August 2009 104
Table 28: Rate type of main mortgage, April 2009 105
Table 29: Fixed rate proportion of owner-occupier lending commitments, January 2000-July 2009 106
Table 30: Provider of main mortgage, April 2009 107
Table 31: Outstanding housing loans on the books of banks, August 2009 107
Table 32: Market shares of outstanding mortgages, August 2009 108
Table 33: Number of different financial products held with each institution by its customers, April 2009 108
Table 34: Number of mortgages held by customers with different main mortgage providers, April 2009 108
Table 35: Investment properties held by customers with different main mortgage providers, April 2009 109
Table 36: Monthly amount spent on main mortgage, April 2009 109
Table 37: Features of main mortgage, April 2009 109
Table 38: Current size of main mortgage, April 2009 110
Table 39: Current size of main mortgage, April 2009 110
Table 40: Proportion of main mortgage customers that used broker for main mortgage, April 2009 110
Table 41: Sources of information used when choosing main mortgage provider, April 2009 111
Table 42: Propensity to use mortgage broker for new mortgage, April 2009 111
Table 43: Time held main mortgage with current mortgage provider, April 2009 111
Table 44: Time mortgage is expected to be held with current provider, April 2009 112
Table 45: Reasons for choosing main mortgage provider, April 2009 112
Table 46: Rate type of main mortgage, April 2009 112
Table 47: Proportion that agree or strongly agree with different attitude statements, April 2009 113
Table 48: Deposit when taking out main mortgage, April 2009 113
Table 49: Sources of deposit for main mortgage, April 2009 113
Table 50: Difficulty of keeping up repayments on main mortgage for the next five years, April 2009 114
Table 51: Proportion that agree or strongly agree with mortgage stress reaction questions, April 2009 114
Table 52: Satisfaction with main mortgage provider, 2008-2009 115
Table 53: Satisfaction with main mortgage provider, April 2009 115
Table 54: Proportion that is satisfied or very satisfied with main mortgage provider, 2008-2009 115
Table 55: Mortgage broker usage, April 2009 116
Table 56: Top reasons for wanting to use mortgage broker, April 2009 116
Table 57: Top reasons for not wanting to use mortgage broker, April 2009 116
Table 58: Propensity for using the internet to arrange mortgage, 2008-2009 117
Table 59: Obstacles to arranging products over the internet, April 2009 117
List of Figures
Figure 1: Consumers tend to fix their rates at interest rate peaks, January 2004-July 2009 5
Figure 2: CBA and Westpac hold 46% of outstanding household mortgages, August 2009 7
Figure 3: Housing credit aggregates reached A$1.0 trillion in July 2009, January 2000-July 2009 18
Figure 4: Owner-occupier housing credit aggregates reached A$733 billion in July 2009, January 2000-July 2009 19
Figure 5: Housing credit aggregates have grown smoothly over the last two years, July 2007-July 2009 20
Figure 6: Lending commitments fell in early 2008, January 2000-July 2009 21
Figure 7: Monthly lending commitments recovered in early 2009, July 2008-July 2009 22
Figure 8: In March 2009 housing debt to housing assets exceed 30%, March 2000-March 2009 23
Figure 9: Interest payments as a proportion of disposable income fell recently, March 2000-June 2009 24
Figure 10: Mortgagors commonly pay A$1,000-1,499 on their main mortgage, April 2009 25
Figure 11: Property prices rose sharply between 2006 and 2008, March 2004-June 2009 26
Figure 12: Property prices in state capitals have converged, March 2004-December 2008 27
Figure 13: Banks accrued over A$1 billion in household mortgage fees in 2008, 2000-2008 28
Figure 14: Lending commitments are forecasted to recover over the next five years, 2000-2013f 29
Figure 15: First home buyers reached a peak in May 2009, January 2000-July 2009 31
Figure 16: Investor proportion of lending commitments has fallen since 2003, January 2000-July 2009 32
Figure 17: Investor proportion of lending commitments hit a low in March 2009, January 2000-July 2009 33
Figure 18: The refinancing proportion of lending commitments has leveled off, January 2000-July 2009 34
Figure 19: Almost one in five mortgagors have held their main mortgage one year or less, April 2009 35
Figure 20: Most mortgagors expect to keep their current mortgage provider for 10 years or more, April 2009 36
Figure 21: A quarter of mortgagors had below 5% deposit for their main mortgage, April 2009 37
Figure 22: Savings is the main source for deposits but not the only one, April 2009 38
Figure 23: The cash interest rate target has fallen from a March 2008 peak, January 2000-October 2009 39
Figure 24: Average fixed rates recently exceeded standard rates, January 2004-August 2009 40
Figure 25: Most mortgagors do not fix their main mortgage, April 2009 41
Figure 26: The fixed rate proportion of lending commitments peaked in March 2008, January 2000-July 2009 42
Figure 27: Consumers tend to fix their rates at interest rate peaks, January 2004-July 2009 43
Figure 28: CBA is the largest individual brand for main mortgages, April 2009 46
Figure 29: CBA has the highest outstanding housing loans on its books, August 2009 47
Figure 30: CBA and Westpac hold 46% of outstanding household mortgages, August 2009 48
Figure 31: NAB customers are more likely to have several mortgages, April 2009 49
Figure 32: NAB customers are more likely to have investment properties, April 2009 50
Figure 33: NAB has the highest proportion of higher value mortgagors, April 2009 51
Figure 34: St.George mortgagors are more likely to have a no-frills main mortgage, April 2009 52
Figure 35: St.George has the highest proportion of lower value mortgagors, April 2009 53
Figure 36: St.George customers had the lowest value original mortgages, April 2009 54
Figure 37: ANZ main mortgage customers are more likely to have used a broker, April 2009 55
Figure 38: ANZ customers commonly regard brokers as a source of information, April 2009 56
Figure 39: ANZ mortgagors are more likely to use a broker for a new mortgage, April 2009 57
Figure 40: CBA mortgagors are more likely to have been with the provider a short period, April 2009 58
Figure 41: Westpac customers are likely to expect to keep their provider long-term, April 2009 59
Figure 42: CBA and NAB customers have the highest number of products with the banks, April 2009 62
Figure 43: CBA customers are the most likely to hold several different products with the bank, April 2009 63
Figure 44: NAB mortgagors are the most likely to hold several product types with the bank, April 2009 64
Figure 45: ANZ mortgagors are more rate-driven, April 2009 65
Figure 46: St.George mortgagors are the most likely to have a fixed rate component, April 2009 66
Figure 47: ANZ mortgagors are the most likely to report mortgage stress, April 2009 67
Figure 48: ANZ mortgagors are the most likely to have had a significant deposit, April 2009 68
Figure 49: St.George customers are the most likely to have saved for their deposit, April 2009 69
Figure 50: CBA customers are more likely to expect payments to become hard, April 2009 70
Figure 51: ANZ and CBA customers commonly have cut back on luxuries, April 2009 71
Figure 52: ANZ customers are more likely to have borrowed elsewhere to afford payments, April 2009 72
Figure 53: Overall mortgage provider satisfaction has fallen, 2008-2009 73
Figure 54: ANZ has the highest proportion of satisfied mortgage customers, April 2009 74
Figure 55: Mortgage provider satisfaction has converged between the banks, 2008-2009 75
Figure 56: Mortgage broker usage and expected future usage is consistent, April 2009 82
Figure 57: Rate consciousness drives mortgage broker usage, April 2009 83
Figure 58: Uncertainty has lowered internet channel usage, 2008-2009 85
Figure 59: Lacking interactivity is an obstacle for internet product arrangement, April 2009 86
Figure 60: Three main product characteristics determine suitability for the internet channel 87

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