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How brokers plan to navigate the difficult lending landscape
ALL TOLD, the Australian housing market is expected to continue tumbling this year, posing some challenges for brokers who rely on the regular exchange of houses, and people’s confidence in the market, to fuel business growth.
Last year, 11.1% of residential properties sold for less than their original purchase prices, making September 2018 the weakest quarter for profit-making resales since 2013, according to CoreLogic’s Pain and Gain Report.
“This is probably the best time for mortgage brokers to thrive by helping clients navigate through the complicated lending landscape” Effie Nie, Ayers Financial Group
No one knows if that trend will persist in 2019, but in the wake of the royal commission’s final report and with a federal election on the horizon, the ratings agencies have forecast drops of 2% to 6% in some areas, with Sydney and Melbourne leading the fall.
A lack of credit availability, tighter lending standards and stricter risk assessments by the banks have been the driving forces behind this downturn, impeding brokers’ day-to-day operations and turnover, and affecting borrowers across the lending spectrum.
While Andrew Mirams, managing director of Intuitive Finance, admits that loan application scrutiny has been unprecedented of late, he rebuffs the dramatic headlines warning that the housing market is on the brink of disaster.
“People are still getting money, and they’re still buying and selling houses.
In buoyant markets and in downturns, people are still trading properties all the time,” Mirams says.
“[But] instead of it being a 100m-hurdle race [for brokers], it’s a 400m-hurdle race.
You have to run a few more hurdles and go a bit longer.”
It seems, however, that the race to the end has been extended permanently.
Tim Lawless, CoreLogic’s director of research, expects lenders’ conservative approach to continue in 2019.
That doesn’t mean no one will get approved, but he suspects that “high-quality borrowers” – such as those with large deposits, low debt-to-income ratios and strong serviceability positions – will be “in the driver’s seat”.
“Overall, we expect housing finance will remain a formidable obstacle to improving housing market conditions next year, but higher-quality borrowers should be able to secure debt at very low rates as lenders compete for their business,” Lawless wrote in his 2019 outlook.
Effie Nie, director of Ayers Financial Group, says a weaker housing market presents both challenges and opportunities for brokers.
While the lending environment has been “fairly rigorous” for the past year or two, brokers have encountered fewer channel conflicts as a result of spreading their loans across a more diverse range of lenders.
“More clients are exploring opportunities with second- and third-tier lenders who heavily rely on the third party channel.
Consequently, this is probably the best time for mortgage brokers to thrive by helping clients navigate through the complicated lending landscape,” she says.
A slowing housing market doesn’t spell bad news for everyone.
“If a person’s home is their castle, if the dwelling they’re living in is going down in value, generally they lose confidence in everything” Patrick Sheppard, Appian Way Financial Services
“First home buyers are now finally entering the market, and high-net worth investors have been very active in searching for great deals.
Housing prices are gradually coming in line with their true underlying value, which sets a strong foundation of sustainable growth for the next 10 years,” Nie says.
In preparation for further headwinds, Ayers Financial Group has shifted its focus to commercial lending for the next 12 months, while maintaining its current level of residential transactions.
Mirams believes that now is the best time for brokers to leverage their experience and expertise to educate clients. His brokerage does a significant amount of the client factfind and data collection up front.
“As an industry, we need to take a greater lead in educating our clients and the whole market; the banks aren’t going to do it.
The 25-year-old bank person that’s lending you money is probably still paying off their first car.”
But there’s another side to the cooling housing market that brokers will have to deal with, says Patrick Sheppard, principal adviser at Appian Way Financial Services.
And that’s managing their clients’ expectations and emotions.
“If a person’s home is their castle, if the dwelling they’re living in is going down in value, generally they lose confidence in everything, in consumer spending, engagement and investing as well,” he says.
Just because the value of property is going down doesn’t mean it’s a bad investment.
“You need to be thinking about the long-term nature of buying low and selling high,” he says.
While buying and selling won’t cease in this market, brokers need to be more sensitive as clients jump on the property roller coaster.
“The biggest impact will be managing the emotional relationship with clients when they realise that their main dwelling and asset is not worth as much as they thought it was, and that needs to be managed carefully,” Sheppard says.
“Numbers speak louder than words, and numbers can be brutal, so you need to prepare them for that.”