Australian Commercial Mortgage Market Presentation

Australian Commercial Mortgage Market

Presentation on the Australian mortgage market

The aim of this presentation is to offer the reader some insights on a very competitive and fragmentized market - the Australian mortgage market. It will tackle subjects like a- brief introduction in the Australian mortgage industry, underlining current trends on the market, discovering types of players involved in the battle for customers, indicate the costs incurred for a credit and illustrate a mortgage product especially designed for the Australian demographics situation.

Evaluated as a 200-billion dollars industry, the Australian mortgage market is a very competitive market with many types of financial institutions offering their products to corporate and individual customers. The players on the Australian market are still encouraged to enter on the market, especially on some parts of the distribution chain, by the increasing profits and growth rates registered by at least one part of the commercial entities present in the market place. The current status of the market could be characterized by the interaction of three forces, which we will present in turn. However competitive the market, it is still very fragmented as the main players are in charge of 48% of total revenues.

Market status - interaction of the three forces: customers, risks and competition

First of all, the consumers, the main constituents for the market growth, can be characterized by more informed mortgage loan acquisitions, situation explained by development of information technology, and especially Internet. Through these means, the average client, possible lender, may find different financing alternatives, according to the services offered, prices and flexibility. If in the late 1970s, there were some worries about the 'lack of illiteracy' and the negative effects of this issue on the financial market (investors making uninformed financial decisions), the situation seems to have changed a great deal since those times. The purchasing power of the average household also increased third fold since the late 1980s, this being translated by an enhanced loan value per average family (70.000 dollars in late 1980s - 200.000 dollars in 2005). Additionally, besides putting funds into land and building investments, the Australians use the stock marked investments to round up their incomes.

As mentioned in the introductory part of this presentation, the competition is very fierce on this particular mortgage market. Besides the classical banking players, which continue to be the market leaders in the field, the analysts observed an up warding trend for the independent mortgage brokers. These financial institutions registered in the last years an average annual increase of 37%, now representing 30% of the Australian market (the market share for the independent mortgage broker is even more important in U.S., around the 50% figure). The independent brokers have a wide variety of financial products, including mortgage loans, from different banks and non-banking financial institutions. This banking approach of offering a multiple product offer from a large diversity of banking institution is called 'cross-selling'. They offer to the customer besides the loan, counselling regarding the loan he is about to acquire, being able to present to him a wide variety of products, not a limited one like in the bank's case.

The customer, may be in a favourable position of choosing itself, after receives the explanations of the broker, the best solution to meet his needs and objectives. So the customer may feel like he is the centre of attention, not like when he goes to a bank, and he might feel obliged and force to contract the sole specific financial products of that particular bank. The third category of financial institutions in the Australian market is the banking franchises, which are independent representatives of a particular bank. The banking franchises combine the bank's branded products and know-how, with the entrepreneurial approach of the franchisee who also assumes, besides the royalty payment, to some of the risks incurred by the business. Although, up to now have been only isolated cases, a considerable attention should be paid to the conflict of interest between the domestic sales force of the bank, whose incomes are affected by decreasing bank's revenues due to customers being able to select bank's products from different sources, and the franchisee. However, these employees should be informed that this situation must encourage them to better perform in front of the customer, in order that the bank better rip off the benefits of competition and they in turn earn higher wages and commissions.

So the main three players on the Australian mortgage market struggle to obtain larger market shares in the context of increasing the demand for loans. They make use of important loan discounts (which refer to decreasing the commissions/fees / and the interest rate for the mortgages), offer grace periods, and in some cases reduce the level of the documentation that has to be provided for the loan granting procedure. This competition has led to a descending trend for the interest rates (around 7-7.5% in 2003), which mean for the financial institutions additional costs. Besides the usual expenditures with implementing an electronic customer-financial institution interface, as to keep-up with the market tendencies, a financial institution must face the issue of decreasing interest rates and offering more benefits to the customer, in order to attract and retain profitable customers (with a certain level of income, performing repeated loan acquisitions during a certain period of time).

The perfect word to describe the Australian mortgage loan market could be dynamism. Every financial entity is trying to attract as many customers as possible. But what should be the most appropriate marketing strategy to do so? Looking at the demographic situation for Australia, the statisticians observed the aging trend, also noticeable at a global level. It should be indicated that estimations for 2051 are quite gloomy, as more than 30% of the population will be over 65 years of age. What is more interesting is that 6-9% will be over 80 years old. One of the strategies a bank or non-banking institution may use to try to retain the existent customers, under the market stagnation conditions forecasts for the next years, and also explained by a surge in the property prices. This desiderate could be achieved by company take-overs and mergers, so that important financial conglomerates may consolidate, and better perform on the market. These financial empires would be able to permit lower commissions, due to increased internal and external economies of scale.

Reverse mortgage - financial product adapted to the demographics situation