5 signs of success in the mortgage sector
Does the mortgage business appeal to you as an investment oppportunity? There's a future in home loans, but what does it look like?
It's been a roller coaster ride for the mortgage business over the past five years and right now competition is intensifying with major banks taking action to gain market share.
However analysis firm IbisWorld insists the mortgage industry is well-positioned for expansion over the next five years although it predicts there will be reduced profitability. Consolidation is on the cards with mergers and acquisitions between building societies, credit unions and banks. The number of businesses is expected to decline – despite incoming foreign subsidiary banks.
Looking ahead to 2019-20, the industry revenue is expected to reach $141.8bn, an annualised growth rate of 10.5 percent.
What will drive the industry?
Obviously the state of residential housing loan rates is an influencer; IbisWorld believes an increase in housing loan rates is likely to benefit the mortgage sector.
Another driver is the ratio of interest payments to disposable income. The higher the ratio the more limited the opportunities, as the debt burden for households increases.
Investor confidence is affected by residential property yields, while housing affordability can affect the demand for mortgages.
Factors that contribute to interest rate rises are economic growth, inflation, housing prices, the strength of the Aussie dollar and the state of the US economy.
The industry is expected to benefit from any rate increases so what happens to the official cash rate will be a key concern. In early February the Reserve Bank Board voted to lower the rate for the first time since August 2013.
Housing Industry of Australia (HIA) chief economist, Harley Dale said at the time, "The RBA hinted at a further elevation in the use of macro prudential tools to restrict mortgage lending in a targeted manner. Care needs to be taken that any such action does not have adverse impacts on confidence and activity in the broader residential market."
A mature industry
Mortgage lending has reached maturity: it is fairly homogenous with little sign of fresh ideas to stimulate demand among consumers, and the number of businesses in the sector has declined. The major four banks have a total share of home lending of more than 66 percent.
According to the latest findings from the Australian Bureau of Statistics, there was a one percent rise in December 2014 compared to the previous month in the total value of dwellings financed.
The market comprises residential owner-occupiers, residential investors and commercial mortgages. Baby boomers are retiring so likely to downsize, add to their funds by investing in rental properties and this means first home buyers will be even more challenged to take the first step to home ownership.
While the percentage of first home buyers searching for finance fell slightly late last year, the average loan size for newbie home buyers rose by $4,700 to $332,200, reports the ABS.
HIA economist, Diwa Hopkins, says "This year will be another healthy one for the national new home building sector. The two key leading indicators of new home building activity, new home sales and residential building approvals, both saw increases during the December quarter of 2014.
"This is a clear indication that actual residential construction activity will rise in the current early months of 2015, which is good news for the broader domestic economy in addition to the housing sector."
5 signs of industry success
IbisWorld suggests that to be a success in this sector requires the following:
- Top level financial and debt management
- New and highly efficient technology and techniques
- Management of a high quality asset portfolio
- Access to funding
- Economies of scale
Products, price and how easy it is to access the service are the key determinants for competing lenders.
It's increasingly difficult for lenders to differentiate their products but innovation is central to competitive advantage. Today technology allows for mobile lenders rather than a total reliance on retail outlets to deliver services.
Not surprisingly, credit worthiness is a big attraction to the consumer. Taking out a mortgage is a big step and consumers prefer to deal with institutions that provide a sense of security and trust.