With so much speculation and anxiety, how can brokers keep new and existing customers satisfied?
Few expected the RBA to cut its cash rate in February, but it’s possible it will fall further still. With so much speculation and anxiety, what can brokers expect for the coming year, and how can they keep new and existing customers satisfied? Sam Richardson investigates.
18 months is a very long time in the industry, and quite long enough for economists, consumers and brokers to get comfortable with the RBA’s 2.50% cash rate. Even those who did expect the rate to change tended to look the wrong way – this magazine included – by speculating when, not if, the cash rate might rise. In fact, just two of the 30 economists and experts surveyed by mortgage comparison site Finder expected February’s rate cut to 2.25%. In a year when the experts seem more wrong than right, how can you reassure clients and keep them, and yourself, in the know?
Let the good times roll
Of course you know that, for mortgage holders, a rate cut is a good thing – it leaves more money in their pockets. But is it a good thing for brokers? Jeff Chapman, national product and marketing manager for LJ Hooker Home Loans, is cautious: “We really feel in a broker market, a better market is a rising market.” When rates rise, he explained, “people need solutions; they need cash flow guidance”. Conversely, those with falling variable rates are having the work done for them.
Glenn Stevens and his team want the rate cut to raise confidence and drive economic recovery; a recovery which brokers can capitalise on. Talking to Ben Eick, LJ Hooker broker for NSW’s Hunter region, it sounds like the rate cut is doing the job. Formerly a classic example of a struggling ex-mining region, the Hunter is now buoyant: “It’s really made people shop around a lot more now, look for those really good fixed rates; they’re so low it’s ridiculous!”
Nearby Sydney and its booming property market was previously held up as the main reason against a rate rise. So, what’s changed? Explaining February’s change in direction, Glenn Stevens told the Senate Economics Committee that “developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy”.
MPA asked Joel Wyld, Oxygen Home Loans broker based in Sydney’s affluent Eastern Suburbs, how the rate change was impacting business. “[The rate cut is causing] another surge in the property market,” admits Wyld. “The knee-jerk reaction by the market when rates go down is that property prices tend to rise quite sharply; the problem is it’s not our clients that are purchasing these properties – it’s still these overseas buyers.” Wealth investors from China can buy in cash and easily outbid Wyld’s clients at auction. Nevertheless he’s “still very confident” about the year ahead.
For both brokers, the rate cut has particularly helped investors, who were previously struggling in an environment of stagnant or even declining rental yields. Here it seems the rate cut could be driving a rational shift away from the more overheated markets, Wyld’s experience suggests: “A lot of my investors were already looking interstate or are starting to look interstate now. The Sydney market is pushing a lot of people out… With rates going down it’s a great thing because the rental yield is strong and any drop in rate improves their positive gearing.”
Finally, interest in refinancing has unsurprisingly increased since the rate cut. Talking at the publication of Mortgage Choice’s half-year results, CEO Michael Russell noted the rate cut “has certainly stimulated an increase in refinance enquiries at Mortgage Choice… our customers can take advantage not just of low interest rates, but [also] the fierce competition that’s happening with our lender panel”.
However, the possibility of further cuts can make potential refinancers hesitant, Wyld cautions: “When rates go down, in my experience, it makes people more cautious than anything else; when rates go down, people say ‘oh, I don’t want to refinance just now, I’ll wait until the dust settles’… rate rises and falls make people think a bit more.”
Jeff Chapman, national product & marketing manager, LJ Hooker
Ben Eick, principal, LJ Hooker Hunter Office
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It’s the economy, stupid
Overcoming client hesitancy, while continuing to recommend clients the right product, will be brokers’ main challenge for 2015 it seems. ING treasurer Michael Witts described the rate cut as a “double-edged sword… Your mortgage repayments are coming down. But as a double edged sword, consumers will be asking ‘what does the RBA know that we don’t know?” Together with Witts and a number of other economic experts, MPA has set out to answer that very question – or at least provide you with the tools to make your own judgement.
When the RBA wants to judge the state of the Australian economy, it focuses on one measure in particular: the unemployment rate. “Labour market data undoubtedly is one of the key elements that the Reserve Bank focuses on, whether it’s vacancies or the actual data,” Witts told MPA, pointing out that the RBA always comments on unemployment in its monetary statements.
What concerns the RBA is that the level of unemployment is not budging, as Glenn Stevens told the House of Representatives economics committee: “The Board considered that this revised assessment – that is, sub-trend growth for longer, a higher peak in the unemployment rate, slightly lower inflation – warranted consideration of some further adjustment to monetary policy.” Connected to unemployment is wages and, at the time of writing, the Australian Bureau of Statistics (ABS) reported that wage growth was at its lowest level for 17 years.
Commonwealth Bank’s chief economist Michael Blythe, when questioned by MPA during the Australian Mortgage Innovation Summit, indicated that rising unemployment could force the RBA to further drop rates. “Forecasts implied a peak in the unemployment rate at 6.4%... clearly we’re going to achieve those forecasts by the end of this year and it must be feeding into their worries and it’s something they look at closely when they think about interest rates.”
A secondary measure to keep track of, ING’s Witts noted, is week-by-week auction clearance rates. “[They’re] a very good litmus test of what’s going on in the market.” These will be familiar to brokers, and the RBA will also be looking at them to see whether low rates are driving Sydney and Melbourne’s overheated markets to dangerous levels, or simply causing sustainable growth nationwide.
The most recent data at the time of writing was RP Data Corelogic’s February Home Value Index, and while prices had increased modestly, auction clearance rates had surged. Auction clearance rates ranged from 82.6% in Sydney to 40% in Perth with an average of 77% – the highest level since 2009. The surge even came as a surprise to Corelogic’s head of research Tim Lawless, he told MPA. “I’m quite surprised at the surge in auction clearance rates; I didn’t expect the cut in rates to provide as much stimulus as, anecdotally, it seems to have had.”
GDP figures are Witts’ third measure that brokers should keep an eye on. In June the ABS will publish Australia’s GDP figures for the March quarter. As GDP is a traditional indicator of economic growth, commentators will be looking at the data for the results of the RBA rate cut. As Witts puts it, “the test of the Reserve Bank’s view will be seen in the March quarter GDP data”.
The limits of prediction
There are other measures which also matter – equities markets, consumer sentiment and exchange rates being the most prominent. However, although informed prediction can be useful up to a point, it’s worth noting that simply changing the cash rate won’t cause an automatic change in the economy – a fact which is increasingly concerning experts.
HSBC chief economist Paul Bloxham, speaking at the Australian Mortgage Innovation Summit, warned that “the RBA is right at the edge of monetary policy”. Governor Stevens’ speech to the Senate lamented that the effect of further reducing interest rates could be “less than it was in the past”, although it still had some effect. Mortgage Choice CEO Russell took a similar, if more reserved view: “There will be a point where a further reduction won’t stimulate buyer demand; it’ll probably continue to stimulate refinance demand… we have to be getting close to that point now.”
Even when RBA policy is effective, it’s important to note the significant gap between cause and effect, insists ING’s Witts. Changes in the interest rate take months to create economic changes, and with wider timeframes come other factors to consider, he adds. “What’s happening in late 2015-16 is the export phase of the resource investment boom; all that money that’s gone into mining and railway equipment and so on means we’ll be able to export more iron ore and in particular liquefied natural gas… what the Reserve Bank’s got to do is balance the domestic market, the consumers market, against what’s happening in the export sector.”
As ever, international conditions beyond the RBA’s control can impact the Australian economy, and may constitute yet another measure to keep an eye on. One of the major reasons for the RBA cutting the rate in February was that a number of other central banks had already done so; official rates are technically negative in Europe, for example. As these economies start to recover, with the US being the most likely to do so, they may consider raising rates and the RBA will have to follow them.
Broking in uncertain times
Clearly, you’re not helpless when it comes to advising your customers what the economy is doing. However, the rate cut calls for a more extensive change in approach, beyond just keeping up with the news. We went back to our brokers and experts to ask what they’re doing to drum up business in the year of uncertainty.
First and foremost, these brokers were going back to the database. “We’re really working hard at the moment to contact all of our customers and offer them the best rate,” explained LJ Hooker broker Eick. “It’s so competitive that if we don’t offer the best rate they will go somewhere else.” His view is reflected by marketing chief Chapman at head office: “Brokers have to get better at segmenting and analysing their database… who is rolling off fixed rates? Not this week, but in three months’ time, because that customer is probably starting to look now, they’re thinking fixed or variable, the banks are starting to look at that customer, to see if the broker’s going to do something.”
“Don’t just say ‘do you want a home loan health check?’ ” Chapman adds. “That’s what everyone’s doing. Say ‘I know you as a customer, would you be interested in talking about this?’ ” Database marketing has been consistently advocated by leading brokerages and aggregators in MPA, in part due to its importance in brokerage diversification; you can offer clients personal, commercial and equipment finance when they’re most likely to need these services.
For those brokerages that are already diversified, the rate cut provides interesting opportunities for cross-selling. LJ Hooker is both a brokerage and real estate agent, which they’ve used to mitigate the effect of falling rental yields on existing clients. “As a real estate provider our team has to become a bad news team, but we’re linking our mortgage guys through to say ‘however, Mr Smith, there are a lot of savings in the mortgage market at the moment; we could tie in a rate reduction on your mortgage,” Chapman explains. “As a brand we might cost them $40 a week in rent but save them $300 a month on their mortgage.”
Finally, Oxygen broker Wyld argues that brokers need to look past rate altogether: “Nobody has a crystal ball… I don’t tend to recommend a fixed or a variable rate product based on what the market’s going to do.” Rather than make recommendations against a predicted schedule of rate changes, he looks at the client’s personal plans: “More important [than rates] is the structure of the loan and whether it suits them. If someone’s planning to start a family or looking to grow an investment portfolio, that’s what we should be focusing on.”
This article originally appeared in MPA magazine 15.04.
18 months is a very long time in the industry, and quite long enough for economists, consumers and brokers to get comfortable with the RBA’s 2.50% cash rate. Even those who did expect the rate to change tended to look the wrong way – this magazine included – by speculating when, not if, the cash rate might rise. In fact, just two of the 30 economists and experts surveyed by mortgage comparison site Finder expected February’s rate cut to 2.25%. In a year when the experts seem more wrong than right, how can you reassure clients and keep them, and yourself, in the know?
Let the good times roll
Of course you know that, for mortgage holders, a rate cut is a good thing – it leaves more money in their pockets. But is it a good thing for brokers? Jeff Chapman, national product and marketing manager for LJ Hooker Home Loans, is cautious: “We really feel in a broker market, a better market is a rising market.” When rates rise, he explained, “people need solutions; they need cash flow guidance”. Conversely, those with falling variable rates are having the work done for them.
Glenn Stevens and his team want the rate cut to raise confidence and drive economic recovery; a recovery which brokers can capitalise on. Talking to Ben Eick, LJ Hooker broker for NSW’s Hunter region, it sounds like the rate cut is doing the job. Formerly a classic example of a struggling ex-mining region, the Hunter is now buoyant: “It’s really made people shop around a lot more now, look for those really good fixed rates; they’re so low it’s ridiculous!”
Nearby Sydney and its booming property market was previously held up as the main reason against a rate rise. So, what’s changed? Explaining February’s change in direction, Glenn Stevens told the Senate Economics Committee that “developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy”.
MPA asked Joel Wyld, Oxygen Home Loans broker based in Sydney’s affluent Eastern Suburbs, how the rate change was impacting business. “[The rate cut is causing] another surge in the property market,” admits Wyld. “The knee-jerk reaction by the market when rates go down is that property prices tend to rise quite sharply; the problem is it’s not our clients that are purchasing these properties – it’s still these overseas buyers.” Wealth investors from China can buy in cash and easily outbid Wyld’s clients at auction. Nevertheless he’s “still very confident” about the year ahead.
For both brokers, the rate cut has particularly helped investors, who were previously struggling in an environment of stagnant or even declining rental yields. Here it seems the rate cut could be driving a rational shift away from the more overheated markets, Wyld’s experience suggests: “A lot of my investors were already looking interstate or are starting to look interstate now. The Sydney market is pushing a lot of people out… With rates going down it’s a great thing because the rental yield is strong and any drop in rate improves their positive gearing.”
Finally, interest in refinancing has unsurprisingly increased since the rate cut. Talking at the publication of Mortgage Choice’s half-year results, CEO Michael Russell noted the rate cut “has certainly stimulated an increase in refinance enquiries at Mortgage Choice… our customers can take advantage not just of low interest rates, but [also] the fierce competition that’s happening with our lender panel”.
However, the possibility of further cuts can make potential refinancers hesitant, Wyld cautions: “When rates go down, in my experience, it makes people more cautious than anything else; when rates go down, people say ‘oh, I don’t want to refinance just now, I’ll wait until the dust settles’… rate rises and falls make people think a bit more.”
Jeff Chapman, national product & marketing manager, LJ Hooker
Michael Witts, treasurer, ING bank Australia
Ben Eick, principal, LJ Hooker Hunter Office
Joel Wyld, mortgage broker, Oxygen Home Loans
It’s the economy, stupid
Overcoming client hesitancy, while continuing to recommend clients the right product, will be brokers’ main challenge for 2015 it seems. ING treasurer Michael Witts described the rate cut as a “double-edged sword… Your mortgage repayments are coming down. But as a double edged sword, consumers will be asking ‘what does the RBA know that we don’t know?” Together with Witts and a number of other economic experts, MPA has set out to answer that very question – or at least provide you with the tools to make your own judgement.
When the RBA wants to judge the state of the Australian economy, it focuses on one measure in particular: the unemployment rate. “Labour market data undoubtedly is one of the key elements that the Reserve Bank focuses on, whether it’s vacancies or the actual data,” Witts told MPA, pointing out that the RBA always comments on unemployment in its monetary statements.
What concerns the RBA is that the level of unemployment is not budging, as Glenn Stevens told the House of Representatives economics committee: “The Board considered that this revised assessment – that is, sub-trend growth for longer, a higher peak in the unemployment rate, slightly lower inflation – warranted consideration of some further adjustment to monetary policy.” Connected to unemployment is wages and, at the time of writing, the Australian Bureau of Statistics (ABS) reported that wage growth was at its lowest level for 17 years.
Commonwealth Bank’s chief economist Michael Blythe, when questioned by MPA during the Australian Mortgage Innovation Summit, indicated that rising unemployment could force the RBA to further drop rates. “Forecasts implied a peak in the unemployment rate at 6.4%... clearly we’re going to achieve those forecasts by the end of this year and it must be feeding into their worries and it’s something they look at closely when they think about interest rates.”
A secondary measure to keep track of, ING’s Witts noted, is week-by-week auction clearance rates. “[They’re] a very good litmus test of what’s going on in the market.” These will be familiar to brokers, and the RBA will also be looking at them to see whether low rates are driving Sydney and Melbourne’s overheated markets to dangerous levels, or simply causing sustainable growth nationwide.
The most recent data at the time of writing was RP Data Corelogic’s February Home Value Index, and while prices had increased modestly, auction clearance rates had surged. Auction clearance rates ranged from 82.6% in Sydney to 40% in Perth with an average of 77% – the highest level since 2009. The surge even came as a surprise to Corelogic’s head of research Tim Lawless, he told MPA. “I’m quite surprised at the surge in auction clearance rates; I didn’t expect the cut in rates to provide as much stimulus as, anecdotally, it seems to have had.”
GDP figures are Witts’ third measure that brokers should keep an eye on. In June the ABS will publish Australia’s GDP figures for the March quarter. As GDP is a traditional indicator of economic growth, commentators will be looking at the data for the results of the RBA rate cut. As Witts puts it, “the test of the Reserve Bank’s view will be seen in the March quarter GDP data”.
Sources of useful information
Labour market data – the Australian Bureau of Statistics publishes monthly reports on its website, and the RBA makes a comment in its board meetings, the minutes of which can also be found online.
Auction clearance rates – Corelogic RP Data publishes a weekly indicator of rates on Thursdays, parts of which can be found in the industry and financial press, including MPA’s sister title Australian Broker.
Expert opinions – mortgage comparison site Finder.com.au surveys 37 experts in advance of the RBA’s monthly meetings to get their predictions on any rate changes – although most of these failed to predict February’s rate cut.
Labour market data – the Australian Bureau of Statistics publishes monthly reports on its website, and the RBA makes a comment in its board meetings, the minutes of which can also be found online.
Auction clearance rates – Corelogic RP Data publishes a weekly indicator of rates on Thursdays, parts of which can be found in the industry and financial press, including MPA’s sister title Australian Broker.
Expert opinions – mortgage comparison site Finder.com.au surveys 37 experts in advance of the RBA’s monthly meetings to get their predictions on any rate changes – although most of these failed to predict February’s rate cut.
The limits of prediction
There are other measures which also matter – equities markets, consumer sentiment and exchange rates being the most prominent. However, although informed prediction can be useful up to a point, it’s worth noting that simply changing the cash rate won’t cause an automatic change in the economy – a fact which is increasingly concerning experts.
HSBC chief economist Paul Bloxham, speaking at the Australian Mortgage Innovation Summit, warned that “the RBA is right at the edge of monetary policy”. Governor Stevens’ speech to the Senate lamented that the effect of further reducing interest rates could be “less than it was in the past”, although it still had some effect. Mortgage Choice CEO Russell took a similar, if more reserved view: “There will be a point where a further reduction won’t stimulate buyer demand; it’ll probably continue to stimulate refinance demand… we have to be getting close to that point now.”
Even when RBA policy is effective, it’s important to note the significant gap between cause and effect, insists ING’s Witts. Changes in the interest rate take months to create economic changes, and with wider timeframes come other factors to consider, he adds. “What’s happening in late 2015-16 is the export phase of the resource investment boom; all that money that’s gone into mining and railway equipment and so on means we’ll be able to export more iron ore and in particular liquefied natural gas… what the Reserve Bank’s got to do is balance the domestic market, the consumers market, against what’s happening in the export sector.”
As ever, international conditions beyond the RBA’s control can impact the Australian economy, and may constitute yet another measure to keep an eye on. One of the major reasons for the RBA cutting the rate in February was that a number of other central banks had already done so; official rates are technically negative in Europe, for example. As these economies start to recover, with the US being the most likely to do so, they may consider raising rates and the RBA will have to follow them.
Broking in uncertain times
Clearly, you’re not helpless when it comes to advising your customers what the economy is doing. However, the rate cut calls for a more extensive change in approach, beyond just keeping up with the news. We went back to our brokers and experts to ask what they’re doing to drum up business in the year of uncertainty.
First and foremost, these brokers were going back to the database. “We’re really working hard at the moment to contact all of our customers and offer them the best rate,” explained LJ Hooker broker Eick. “It’s so competitive that if we don’t offer the best rate they will go somewhere else.” His view is reflected by marketing chief Chapman at head office: “Brokers have to get better at segmenting and analysing their database… who is rolling off fixed rates? Not this week, but in three months’ time, because that customer is probably starting to look now, they’re thinking fixed or variable, the banks are starting to look at that customer, to see if the broker’s going to do something.”
“Don’t just say ‘do you want a home loan health check?’ ” Chapman adds. “That’s what everyone’s doing. Say ‘I know you as a customer, would you be interested in talking about this?’ ” Database marketing has been consistently advocated by leading brokerages and aggregators in MPA, in part due to its importance in brokerage diversification; you can offer clients personal, commercial and equipment finance when they’re most likely to need these services.
For those brokerages that are already diversified, the rate cut provides interesting opportunities for cross-selling. LJ Hooker is both a brokerage and real estate agent, which they’ve used to mitigate the effect of falling rental yields on existing clients. “As a real estate provider our team has to become a bad news team, but we’re linking our mortgage guys through to say ‘however, Mr Smith, there are a lot of savings in the mortgage market at the moment; we could tie in a rate reduction on your mortgage,” Chapman explains. “As a brand we might cost them $40 a week in rent but save them $300 a month on their mortgage.”
Finally, Oxygen broker Wyld argues that brokers need to look past rate altogether: “Nobody has a crystal ball… I don’t tend to recommend a fixed or a variable rate product based on what the market’s going to do.” Rather than make recommendations against a predicted schedule of rate changes, he looks at the client’s personal plans: “More important [than rates] is the structure of the loan and whether it suits them. If someone’s planning to start a family or looking to grow an investment portfolio, that’s what we should be focusing on.”
This article originally appeared in MPA magazine 15.04.
