The ‘new normal’ in mortgage growth

There were two new mortgage industry reports released yesterday that painted a picture of an increasingly realistic industry. Genworth released its Home Grown Report, which surveys mortgage industry attitudes and expectations for the year ahead, and Deloitte released its Australian Mortgage Report, which seeks to define conditions for the year ahead.

The Deloitte report is probably the more sober, given its semi-0objective standpoint. It predicts that 5% mortgage growth is the “new normal”:

Market, or system growth, of 5% p.a. will be a “new normal”. Together with the backdrop of an aging population moving from having a mortgage to downsizing, and households deleveraging, it will be a challenging environment for banks to achieve greater growth without taking market share from other providers.

Splendid! What a relief to find an industry player summarising ongoing conditions in such a realistic fashion. What Deloitte doesn’t say, though, is that 5% aggregate mortgage growth is a recession for house prices. This level of disleveraging will guarantee further house price falls, probably in the vicinity of those seen in the last year. The concern of course is that if Australia’s 1.1 million negatively geared property investors suspect this new normal, they are unlikely to sit on their hands. Still, a breath of fresh air.

The Genworth report is also quite downbeat though less so:

Lending growth slows in 2011, most lenders expect difficult year ahead with fewer first homebuyers and investors
• Majority of lenders have had some business growth over the past year, though wholesale lending has decreased
• Banks are performing the best out of the lender segments (banks, credit unions and building societies, brokers, wholesale lenders and originators).
• Lenders expect 2012 to be a difficult year, mostly due to underemployment in the market. Other factors include tight financing conditions
• For lenders who expect business growth in 2012, it’s expected to be driven by a focus on channel strategy/distribution
• Lenders say the typical borrower in 2012 is expected to be mostly refinancers, with first homebuyers (FHBs) and investors expected to drop off (affordability continues to keep FHBs out of the market). Western Australia and Queensland experience largest lending growth while South Australia/Tasmania see largest drop
• Brokers are more optimistic than lenders
• Have seen a drop in lending due to lack of borrowers, especially FHBs
• Brokers also expect refinancers to increase in 2012 and FHBs and upgraders to decrease
• Brokers have a better perception of lender service than in 2010
• Most brokers believe lenders can improve on technological innovation.

Here is a chart of last year’s expectations versus this year’s.

Sobering stuff from a industry renowned for its ‘boundless optimism’. Both reports below.

Home Grown Report 2011

Deloitte a New Normal AMR 2012

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. And right at the very end of the AAP article (but not in the Deloitte executive summary or press release) they had:

    “The group also predicted house prices would be flat or fall by up to five per cent in 2012.”

  2. Wasted OpportunitiesMEMBER

    The chart at the end indicates about 25% of respondents expect a contraction of lending (either more or less than 10%). Wouldn’t this be a catastrophic scenario for house prices?

    I esem to remember a previous MB post highlighting that mortgage lending growth has typically had to run at over 10% to sustain the bubble house price growth. When was the last time there was a contraction in lending?

    In light of this, 25% expecting this outcome would be astonishing.

    • Under that scenario, bank valuations would drop considerably, and therefore the ASX200, since as part of the ASX8, they are the only industrials providing meaningful profit growth….

      High single digit P/E’s (what banks use to trade at pre-financialisation) with possibly stagnant dividend yields (as payout ratios decline).

      Possible or probable?

      • You’d think the overt signs of a credit crisis is what to look for, at this point it is not probable until that is merely a spectre.

        I think one issue with that for most mum and dad consumers in that, bond markets are not popular like the share market in the MSM, as you have pointed out Prince equity follows debt markets. The consumer will be the last to know what is going on. Ironically it seems the safe and conservative hard working Gen X who did the right thing and tried to get in on the property market will be the innocent loser out of all of this.

        Return to fundamentals may not happen in the heavily financialised share market, but it is a high possibility in the investment housing market.

      • Prince,

        I think bank valuations will fall. Surely dividends will be stagnant at best over the medium term.

        I disagree about them being the only industrials providing meaningful profit growth.

        I think we could see a decline of the banks being offset by price increases to more defensive companies – eg WOW and TLS which have some value.

        We have seen massive hits to US banks whilst other companies have done okay (esp tech co’s). Perhaps we will see something a little similar.

        The financial sector has become way too big in world financial markets and will be forced to rebalance. Maybe an adjustment to more agriculture and manufacturing?

        • Macros, have a look at this:

          So the big 8 “Houses and Holes” companies contributed 99% of all profit growth (to June 30 2011) and made up 75% of all profits for the top 50 companies in Australia. The only other profit growth came from energy companies who also require high commodity prices.

          We’ll have a clearer picture at the HY earnings season early next year, and of course, there are individual companies that will have excellent profit growth, but in aggregrate (by market cap), its all up to the ASX8, since the ASX42 aren’t doing any heavy lifting.

          This is the problem with Houses and Holes – the concentration risk is huge for index followers.

          • Prince,

            Agreed that there is a problem for index followers.

            Not sure about the 75% figure (I’m away this week so can’t verify it for myself).

            Energy prices are more likely to remain strong, as are agricultural and precious metal prices.

            I’m not so certain that the houses and holes situation will last forever. Rebalances may result in a lower concentration of earnings. Who knows? Obviously it is a dynamic situation and one in which does not seem to have any clear historical precedent.

  3. Considering the offshore debt markets are now closed, cuts to lending are far more likely than increases.

    This closure has been developing through the year and is now a fact of life. Opening the markets is going to prove much more difficult than closing them, imo. In this case, there will be a prolonged period of lending contraction as the banking industry re-align their balance sheets and domestic savings adjust to replace external borrowings. Considering the scale of debts involved, this is going to take many years.

  4. On Radio National yesterday David Murray admitted Australian houses are overvalued, and took some of the blame. It worth a listen to IMO as he goes through some outcomes.

      • Cancerward I trust DeepT more than David..although the times I’ve listened to him, or seen him interviewed he’s come across quite well IMO.

        I emailed the future fund last year when SME finance was getting tight and asked:

        Thank you for your email and interest in the Future Fund.

        Under its mandate the Board is required to target a return of at least CPI +4.5% per annum with acceptable but not excessive risk.

        Accordingly the Board has developed and is implementing an investment strategy that invests across a diversity of countries, asset classes and sectors. Investment in overseas markets is extremely important to achieving the Fund’s objective, but the program also includes the investment of significant capital in Australia – our last annual report indicated that around 44% of the Future Fund (excluding the Telstra holding and cash holdings) was invested in Australia .

        Thank you again for your interest.

        Kind regards

        CAUTION – The information transmitted is for the use of the intended recipient only and may contain confidential and/or legally privileged material. Any review, re-transmission, disclosure, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you have received this e-mail in error please notify us by return email or by contacting the Future Fund Reception on +61 (0)3 8656 6400 and delete all copies of this transmission together with any attachments.

        Subject: Question

        Dear Sir/Madam,

        Can someone explain why the Future Fund is investing in British startup business, and not Australian ones when I hear so much from SME’s here that they can’t get funding from the banks?


        Anyway, I sent my email on 16th Sept 2010, and I wonder how those British SME’s are going…

        This got me pretty wound up when we’re always willing to bail out the banks, and we get this crap from the politicians pension SWF. Also, the Telstra subsequent investment decisions by the FF.

        It says a lot IMO.