Find below the biannual J.P.Morgan Mortgage Industry Report (formerly co-authored with Fujitsu Consulting). Here is the executive summary:
This report is a collaboration between J.P. Morgan and DFA, using industry analysis, modeling, and primary consumer research to focus on developments in the Australian Mortgage Industry.
This edition of the report (Volume 16) acknowledges the contribution of higher repayments towards lower rates of credit growth, but focuses on recent mortgage approvals data.
Although lower mortgage rates have provided an avenue for borrowers to repay debt, it has not contributed towards an offsetting uplift in mortgage approvals. Interestingly, not only are the volume of approvals weak, but the average value of approvals is declining. While this may simplistically be dismissed as a broader indication of stalled house prices, we conclude that a degree of tightness for refinancings is evident – particularly for First Time Buyers.
‘Housing credit growth has continued to soften since breaking below double-digit growth rates in mid-2008. In fact, the most recent 3 month annualized growth rate of 3.6% for housing credit in August 2012 is the lowest level since the RBA started disclosing credit aggregates in 1976! Given the current outlook, we expect low rates of credit growth to continue –with risk to the downside – as opposed to watching out for a quick rebound off the back of lower interest rates.
Extended Mortgage Duration – Are Borrowers Getting Locked In, Or Locked Out?
Investor loans are holding ground. It is owner occupied repayments that are pulling down growth rates Lower growth rates are not a result of a constant dollar value of net growth each period on a higher level of outstanding balances. Rather, the dollar value of growth each period is declining. Although owner occupied approvals remain little changed in recent years (consistent with investor loans), it is the value of repayments that has accelerated.Overlapping waves of approval dips and surges has muddied the waters
The housing market was already entering a period of weakness prior to the monetary and fiscal stimulus of late 2008, with the volume of mortgage approvals for moving lready suffering a 15% decline by mid-2008. This was over-taken by a surge in the volume of First Time Buyers in late 2008 / early 2009 (via government incentives), followed by a surge in the volume of new construction (again via government
incentives). The combined effect was a 2010 recovery in re-financing as house prices re-inflated. However, more recently, there has been an absence of meaningful growth in the volume of approvals across all categories.Growth in the average value of each form of owner occupied approval is now in negative territory
This is the first time this has occurred since data became available in the early 1990’s! One key reason we offer is a significant reduction in the LVR at which refinancings are taking place.Extended mortgage duration may be a sign of being ‘locked out’, not ‘locked in’
The softness in house prices and associated difficulty in seeking re-financings is resulting in extended loan durations across all segments, but is particularly evident with First Time Buyers. While mortgage duration of other types of borrowers has extended by ~20% since 2008, the duration of First Time Buyer mortgages has more than doubled from ~20 months to >40 months. First Time Buyers not only have a higher proportion of existing loans applying to be re-financed, but also have a higher proportion of those re-financing applications rejected. We also consider how each of the major banks is responding to the ongoing low growth environment. We conclude:Discounting has eased
Deposit spreads remain under pressure. This has been met by a new round of out-ofcycle rate rises and reductions to discounts on new loans in order to preserve Net Interest Margins. The average discount applied to a new loan has eased by ~10bp from ~90bp to ~80bp since our last Mortgage Industry report in March 2012.Intentions of each major bank are becoming clear
Overall, we believe that the shape of how banks will fund growth will continue to evolve. Most notably, looking at the current positioning of those banks with the highest loan to deposit ratios – WBC and NAB – we contrast their polarized view of approaching the mortgage market at present:
WBC’s SVR mortgage product is priced 10bp above peers. They growing below system at ~4% and are losing market share.
NAB’s SVR mortgage product is cheapest amongst major banks (and they have committed to remaining so for the rest of the year). They are growing above system at ~9% and are gaining market share. Both have a loan to deposit ratio of 160%. Surely only one of them can be right? Mortgage Industry UpdateOver the last six months, the following themes have been of interest:
Although CBA and WBC are ceding share to NAB, as a whole, major banks continue to marginally take share.
Following the RBA’s 150bp reduction to the Official Cash Rate over the last 12 months, the household interest burden to disposable income has reduced from ~9.4% to ~8.4%;
Given the current structural challenges facing housing credit growth, it is difficult to drive housing credit growth beyond current levels,
Mortgage broker usage continues to increase back towards pre-GFC levels (but profitability has not), and
Mortgage profitability continues to be supported by longer loan durations, with NIM providing a smaller drag via out-of-cycle rate rises and smaller discounts.
Australian Mortgage Industry – Volume 16
