Sentiment survey - Q4 2008 report

Australia’s third-party distribution channel has grown rapidly over the last decade but events of the last 12 months have had a dramatic affect on all industry stakeholders, including brokers, aggregators, lenders and suppliers.

Commission reductions, the disappearance of some lenders, significant changes to product and pricing, and the advance of regulation have caused many brokers to rethink their business.

There is no shortage of theories as to how the broking industry will evolve from here, but until now there has been little to quantify the true picture.

The Mortgage Business Sentiment Survey gives the industry the first real insight into the perceptions of the third-party channel, and over time this quarterly report – using data generated by the survey – will provide the industry with an accurate illustration of broker sentiment on a range of business, economic and industry issues.

BUSINESS ISSUES
Commission sustainability: For many, 2008 will be remembered for the sweeping reductions that came to bare on broker commissions.

Back in April, at the time of the first cuts, the focus of industry commentary fell on the prospect of a substantial reduction in broker numbers – though this has yet to materialise. The third-party industry remains robust and the outcome of commission cuts has been the re-think of brokers’ client value proposition and opportunities for diversification.

Six months on from initial bank commission cuts, and while commissions remain a concern for the industry, a narrow majority of 53.2 per cent believe that they are sustainable at their current levels; 39 per cent say they are not while 7.8 per cent are unsure.

Interestingly, despite concern from over a third of the industry that commissions are not sustainable, only a moderate 7.6 per cent of respondents are thinking about leaving the mortgage industry during the coming quarter.

Volumes growth: The industry remains comparatively positive about the business outlook for the coming quarter with 50.1 per cent expecting their volumes to increase.
This can be linked with the two per cent reduction in the cash rate between September and November and the increased government incentives for first home buyers. Only 21.2 per cent expect loan volumes to slide while 28.7 per cent of respondents said volumes will remain the same.

Business drivers: The mortgage industry believes that the first home owner market will be most active over the coming quarter with 52.0 per cent seeing the sector as the key driver for business activity.

This sentiment was supported by data released by the Housing Industry Association (HIA) in November which showed that new house sales leaped by 6.7 per cent in mid-October. Nearly a third of survey respondents (30.1 per cent) expect refinancing to be most active, followed by investors (13.1 per cent) and upsizers/ downsizers (4.8 per cent).

Overall respondents were split in terms of where they expect to generate most business from in the quarter ahead: 51.7 per cent of respondents will look to existing clients while 48.3 per cent will source most business from new clients.

Overall business confidence: While overall business confidence for the coming quarter is modest, 47.9 per cent of respondents believe their business will experience growth compared to 35.0 per cent that said business would remain the same. Only 17.1 per cent expect business to drop off.

Business development: Modest expectations for business growth are also reflected in predictions for staffing levels over the coming quarter. Only 12.2 per cent of respondents plan to hire over the coming quarter; 9.7 per cent will cut staff while a majority 78.1 per cent see staffing levels remaining stable.
Marketing will also take a back seat for many businesses over the coming quarter with only 38.4 per cent of respondents indicating that they’ll up their marketing spend.


THE ECONOMY
Management of the economy: The federal government’s reaction to the worsening global situation has been met with approval from the majority of the industry.

This is reflected in 60.2 per cent of respondents agreeing that the government is doing a good job of controlling inflation through its management of monetary policy. This compares with 31.5 per cent who disagree, and 8.3 per cent who are not sure.

Overall, 46.3 per cent of respondents said the federal government was effectively managing the economy whereas 40.4 per cent said they were not, followed by 13.3 per cent who did not know.

Economic conditions: While there is support for the government’s management of the economy, most in the industry feel that they are worse off this quarter than they were in the previous quarter.

Unprecedented global economic and financial turmoil has dominated the last three months: numerous countries have slipped into recession, financial giant Citigroup has been nationalised, and the federal government has moved to sure up the Australian banking system through deposit guarantees.

When asked to compare this quarter’s economic conditions with the previous quarter, 60.7 per cent said they were worse. Only 20.4 per cent said that this quarter’s economic conditions were better; 18.9 per cent said they were the same.

It is important to note that despite considerable action by the federal government in response to conditions over this current quarter, a lag is to be expected before the results are seen – the next quarter’s survey findings will no doubt be interesting.

Impact of RBA interest rates: A two per cent cut to the official cash rate over the period of September to November has been met with industry approval, with a resounding 75.3 per cent of respondents agreeing that the current RBA rate will have a positive impact on home loan volumes.

Viewed in isolation, the RBA rate reductions – the first time the central bank cut rates since September 2001 – are obvious drivers for more consumers to either enter the market or move into new homes.

However coupled with the federal government’s stimulus package to motivate competition in the mortgage market, plus a significant boost to the first home buyer grant, it is hoped that home loan volumes will rise. Whether they do will become clear once housing data and loan performance figures are released over the coming months.

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Mortgage business index: 37

To help crystallise the key findings of the quarterly survey, the Mortgage Business Index measures overall expectations for growth across the broker industry.

The index – which this quarter sits at 37 – is based on a number of key business indicators exclusively from the 521 brokers that completed this quarter’s Mortgage Business Sentiment Survey (which had a total pool of 631).

Expectations for loan volumes, plans to increase staffing levels, business investment plans and expected overall growth determine the index level each quarter.
The index ranges from 0-100; the higher the figure the more positive mortgage brokers are towards growth over the coming quarter.

The Mortgage Business Index will be a key benchmarking tool to map industry progression.

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DATA WRAP: BUSINESS ISSUES

Do you think current commission levels are sustainable?
Yes: 53.2%
No: 39.0%
Don’t know : 7.8%

Over the coming quarter do you expect to:
Keep staffing levels the same: 78.1%
Hire staff: 12.2%
Cut staff: 9.7%

Do you expect your business over the coming quarter to:
Grow: 47.9%
Remain the same: 35.0%
Decline: 17.1%

Which sector do you expect to be most active over the coming quarter?
First home buyers: 52.0%
Refinancing: 30.1%
Investors : 3.1%
Upsize/ downsize: 4.8%

Are you considering leaving the mortgage industry during the coming quarter?
No: 84.6%
Don’t know: 7.8%
Yes: 7.6%

Residential property prices over the coming quarter will:
Remain static: 56.7%
Fall: 32.4%
Rise: 10.9%

Do you intend to spend more money marketing your business this coming quarter compared to the current quarter?
No: 5.9%
Yes: 38.4%
Don’t know: 5.7%

Where do you expect to source most business from over the coming quarter?
Existing clients: 51.7%
New clients: 48.3%

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DATA WRAP: THE PROPERTY MARKET

Residential property prices over the coming quarter will:
Remain static: 56.7%
Fall: 2.3%
Rise: 10.9%

Property sales over the coming quarter will:
Increase: 42.5%
Remain the same: 34.2%
Decrease: 23.3%

Do you believe the property market over the coming quarter will represent good value to buyers?
Yes: 84.5%
No : 9.4%
Don’t know: 6.1%

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DATA WRAP: THE ECONOMY

Is the federal government doing a good job of managing our economy?
Yes: 46.3%
No: 40.4%
Don’t know: 13.3%

What impact will the current RBA interest rate have on demand for home loans over the coming quarter?
Positive: 75.3%
None: 22.3%
Negative: 2.4%

What will happen to interest rates over the next quarter?
Decrease: 97.0%
No change: 2.0%
Increase: 1.0%

Is the RBA doing a good job of controlling inflation through its management
of monetary policy?
Yes: 60.2%
No: 31.5%
Don’t know: 8.3%

How do current economic conditions compare this quarter with the previous quarter?
Worse: 60.7%
Better: 20.4%
Same: 8.9%

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VOLUMES GROWTH
What are your expectations for your loan volumes over the coming quarter compared to the current quarter?

Increase 50.1%
Remain the same 28.7%
Decrease 21.2%

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DEMOGRAPHICS
Total survey respondents: 631

Years in industry (average): 12.35

Residential loans as percentage of revenue: 91-100% (53.6%); 81-90% (22.0%); 71-80% (8.6%)

State breakdown: ACT 2.2%; NSW 28.1%; NT 0.6%; SA 5.5%; TAS 1.3%; VIC 23.6%; WA 14.9%; QLD 23.8%

Industry sector: broker 82.6%; aggregator 2.5%; mortgage manager/ originator 8.9%; lender 3.0%; other 3.0%