Mortgage Broker’s response to Four Corner’s ‘Betting on the House’
On Monday 21st August 2017, the ABC’s Four Corners program investigated Australia’s housing industry, and a series of featured experts warned that the real estate market was heading for a correction, which they believed, would be serious and painful for investors and home owners who may be caught-up in the worst aspects of a down-trending market.
Property Prices Higher Relative to Incomes
US economist and investment fund advisor, Jonathan Tepper, drew attention to Australian real estate’s price-to-income ratio – the ratio of the purchase price of a property to average incomes.
“Price-to-income ratios are very high in Australia compared to other countries,” Tepper said. “If you’re looking at New York or San Francisco, for example, Sydney is much more expensive on a price-to-income basis.”
“Why should people in Rooty Hill, Blacktown and Mt Druitt be paying higher multiples than people are paying in Silicon Valley?” It’s a valid question and further cause for people wanting to buy a home now to reflect on where they may find better value for their real estate dollar; out of the big cities and in interstate markets that are not as hot and are yet to witness escalating prices to the extent places like Sydney and Melbourne have seen.
Responsible Lending Practices
It is not just higher prices or pent-up demand that is responsible for the current circumstances prevailing in Australia’s property market. The approach that banks and other lenders take during a market which is running hot can have an impact on what follows after the market peak has been reached.
Former banker and author, Satyajit Das, told Four Corners that, although it was desirable for banks to grow, a problem can arise where lenders are tempted to approve loans to borrowers who may not have adequate capacity to comfortably meet repayments. The recent moves by APRA to limit the growth of some types of lending are leading to a safer and stronger financial system able to weather any market storms.
Australia’s Robust Financial System
Hamish Ferguson, from Vision Property & Finance’s Newcastle office, has been a mortgage broker for almost two decades and has seen many of the changes that have occurred in Australia’s dynamic property market. He has seen the property market change through all phases of the cycle, and the current situation is a familiar one from past property cycles Hamish has lived through.
Hamish says Australian’s can be confident that our financial system has the necessary checks and balances to prevent a collapse in the market like that seen in the United States throughout the Global Financial Crisis of 2007 and 2008.
Mortgage Broker’s Two-Step Application Process
Australian banks are far more stringent in checking both borrowers’ capacity to repay loans and the value of properties borrowers may be looking to purchase. Hamish says Mortgage brokers provide another level of checking that needs to be completed before applications go further in the process.
“When a borrower uses a mortgage broker to finance a property the application effectively goes through a two-step process. Firstly, brokers will interview their client to find out what their needs and circumstances are, and at this stage an initial calculation of a client’s likely borrowing limit will be made. If the client’s circumstances permit, the second step in the process involves compiling all of the necessary information financial institutions need to progress an application, including supplying evidence of an applicant’s capacity.”
Independent Property Valuation
Another key feature of the Australian system of lending is the independent valuation of property.
“Mortgage brokers don’t become involved in the valuation of the property,” said Hamish. “Instead, this is done by a third party unrelated to the financial institution we may use so a fair and accurate value for the property can be determined.”
Although brokers are sometimes not sure how a property’s valuation is reached, it is a fact that the loan process can be halted because a property’s valuation doesn’t meet a financial institutions standard. Using a third party to complete the valuation is one of the checks and balances built into the system.
The Mortgage Stress Test
Hamish says, although the industry regulator is applying some tightening of lending rules which is helping to solidify the industry’s position, mortgage brokers already ‘stress test’ a loan by factoring in a hypothetical interest rate increase.
“We are applying an extra 2 per cent – in some cases an extra 3 per cent – to the loan to make sure borrowers are still able to service their mortgage even if interest rates increase.”
The Key Mortgage Broker-Client Relationship
Good client relationships are essential for mortgage brokers because your average mortgage broker doesn’t have the large promotional budget of the big banks or the advertising-driven high inquiry levels a big bank may enjoy. Word of mouth from satisfied clients, and repeat future business from happy clients, are the key drivers of a successful brokerage.
Hamish says this means mortgage brokers are often more interested in giving good advice which helps advance the client’s financial standing rather than harming it. Brokers typically invest more time trying to understand their client’s needs, resulting in outcomes for their clients that are far better.
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