Volatile times in a mortgage industry waiting for confidence to return

Mortgage lenders facilitate the realisation of the Australian dream. Yet even they are not immune from the downturn the Australian economy has endured, leading to a drop in demand for home finance.

The industry has experienced high volatility in recent years. During 2007-08 (and in earlier years), the industry experienced robust growth as a credit boom and strong conditions in the housing market underpinned demand for mortgages. During 2008-09 and 2009-10, revenue plunged as the global financial crisis led demand for credit to fall sharply, and the housing market stalled.

The industry rebounded strongly the following year on the back of sharp cuts to interest rates, government support for the industry and pent-up demand for housing.

During 2012-13, industry performance will be poor with a decline of 0.4% forecast, as the slowing economy and weak consumer confidence weigh on demand for mortgages.

Compounding this is stagnant house prices that have resulted from the recent economic climate. Renewed global financial instability and intensive competition in the industry are also expected to constrain profitability. IBISWorld estimates industry revenue will increase at an annualised 1.3% over the five years through 2012-13 to reach $91.8 billion – a lacklustre performance but not surprising considering the state of the economy over that time.

The next five years is expected to bring healthy growth as the strengthening economy and strong underlying demand for housing underpin growth in mortgages. Banks should also benefit from rising customer deposits and the introduction of covered bonds, which will reduce reliance on overseas borrowing.

However, profitability is expected to come under pressure from rising competition in the industry as banks and brokers vie for market share, while increased capital requirements under new Basel III banking reforms will increase funding costs.

Industry at a Glance

The industry’s major threat remains a collapse in the housing market, but solid fundamentals and further forecast interest rates rises make this unlikely. IBISWorld estimates industry revenue will increase at an annualised 3.5% over the five years through 2017-18 to total $109 billion.