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RP Data's view is that we will see growth in dwelling values slow to more sustainable levels in 2014, and broadly in line with income growth. In my blog today, I’m setting out my expectations as to what this may mean for Australia’s mortgage market in 2014.
I believe that a strong employment market is critical to the health of the mortgage market in terms of both new originations and the performance of those mortgages. Whilst labour market conditions are expected to continue to soften in 2014 as we see fewer full time employment opportunities, unemployment remains low by both historical and international standards and is not expected to materially impact the mortgage market in 2014, absent some external shock to the economy.
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Investors were an extremely large component of the mortgage market in 2014, attracted by lowinterest rates, robust capital growth expectations and uncertainty with respect to returns in equity markets. We expect investors to pull back in markets such as Sydney and Melbourne in 2014 as yields decline and turn their attention towards markets such as Brisbane where there are higher capital growth opportunities..
First-home buyers were largely absent from the key markets in 2013 as affordability constraints and strong investor appetite limited their ability to enter the market. We believe lending institutions will increasingly focus their attention on attracting more first home buyers into the property market in 2014,, particularly given the more limited State Government incentives and stamp duty concession programmes available.
Distribution channels Third-party distribution will continue to grow in 2014, although it appears to be stagnating in the 45% to 50% range. Lending institutions will increasingly explore online distribution capabilities and also further empower the retail network where applicable.
Refinancing We expect strong levels of refinancing activity in 2014, driven by continued low interest rates and incentives from lending institutions to attract new business. In contrast, lending institutions can be expected to place greater focus on retention initiatives.
Product We expect lending institutions to increasingly focus on product design and seek to address affordability issues for first home buyers. However that does not mean the return of the 100% mortgage, given the lessons learned from the GFC.. Nor for that matter do we see the significance of returning to a low doc lending environment. It will be interesting to watch the potential re-emergence of non-conforming lending, driven by increased funding availability and greater transparency potentially driven by comprehensive reporting.
Mortgage pricing is likely to remain very competitive in 2014 as lenders seek to achieve their growth objectives. Subtle differential pricing strategies may emerge in the market as lending institutions potentially look to use price levers to manage their new origination mix, particularly given strong investor and high LVR activity in late 2013.
Mortgage arrears Are unlikely to materially increase in 2014 given unemployment remains under control, interest rates are likely to remain low in 2014, the strong level of home price appreciation experienced over the past 18 months and the stronger lending appetite of lenders in the near prime and nonconforming space to take on those borrowers that may have encountered some difficulties in the past. The key point is that most borrowers are likely to have some options if they experience financial distress in 2014 as a result of the strong increase in home values in most markets over the past 18 months. Nevertheless, lenders will be keeping a close eye on those parts of the country that may experience labour market stress as a result of their reliance on employment in the automotive, manufacturing and supporting industries.
Regulation APRA will be keeping a close eye on lending standards in 2014, in particular the level and extent of new lending with loan to value ratios over 80%, which stood at 34.7% in the September 2013 quarter. Absent a material spike in that percentage in the last quarter of 2013 and/or first quarter of 2014, they are unlikely to impose any high LVR speed limits in 2014. In contrast, ASIC can be expected to increase their vigilance and enforcement activity in respect of responsible lending obligations assumed by both credit intermediaries and lending institutions
In summary, a strong year is expected for mortgage market in 2014, driven by continued low interest rates, strong consumer confidence and public expectations that properly values in markets such as Sydney, Melbourne and Brisbane will continue to rise in 2014. As always, consumer confidence and unemployment each remain critical to the ultimate performance of the market.
