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Mortgage Broking

This article highlights some of the changes going on in mortgage broking in Australia. It also underlines the importance of good industry data - such debates cannot even be had here with any real precision - because we don't yet properly assess what is going on with intermediated loans.

Sometimes it's good to remind oneself when one is wrong. A few years ago -- lets say six years -- I would have been surprised if you had told me that mortgage brokers were going to own such a large part of the market. But they do. What I found interesting about this article is that they have started to think in terms of a lifecycle for that industry. Will mortgage broking in Australia now shrink back a bit, and to what extent? I do not think it will disappear, but where is equilibrium in this market?

Regulation Pressure Gauge

According to the genius of our our regulation pressure gauge, the dials you need to watch are showing:

  • Timing = June 2006
  • Severity = Medium-High

Medium-high translates as: prospectus, commission disclosure, and some form of licensing, but not full 'Aussie'-style licensing.

We'll have a nice visual gauge for you to track in the next few days.

ISI Manual of Practice Standards

In discussions with a client, I must admit, I thought the old code of business practices had lapsed. It turns out that it has, but the manual of practice standards has replaced it. What prompted the discussion was a chat with an adviser who said he never bothered with advice on policy replacement forms; because companies never read them anyway.

I checked in with the ISI and these forms are still a requirement. So if you're in a life company reading this thinking 'oh no, we actually track carefully the content of those forms and follow up people that don't fill them in properly' then I'd love to hear from you - because it seems this piece of self-regulation is just not used in any meaningful sense.

The Manual of Practice Standards.

What WILL happen - post regulation? Find out at Fundsource

What will happen, post regulation? While specifics are hard to nail down because they have not yet been agreed, this is the logical train of thought:

  1. The taskforce has been set up to decide not whether to regulate, but how to regulate.
  2. The outcome will probably not be as draconian as the Aussie regime, which is now being criticised (see 'STILL don't have a clue' article below).
  3. So we're looking at 'Aussie Lite' as a regulatory regime.
  4. ANY regime will have costs - even if cash costs are not high, costs appear in time, changed processes, documents, software, and lost opportunities.
  5. BUT the regime may have some benefits as well - and depending on how sensible it is, these may outweigh the costs (but we don;t know yet). Benefits could include increased consumer confidence, and a more level playing field: like restraining real-estate agents from their more egregious sales puffery when selling investment properties.
  6. Regulation tends to increased fixed costs more than variable: In Australia it was an estimate A$50k to comply in year one - whether you wrote $1 of business or $1million.
  7. Increases in fixed costs tend to mean that business size increases - you get together to share to compliance overhead. Hence the popularity of dealer groups.
  8. So dealer groups - corporate brokers - bigger adviser businesses, by any name are on the way.

That's why we've been doing lots of work on them over the past two years. If you want to find out more, I'll be speaking on the subject at the Fundsource conference on March 18 just after Michael Webb. Go and register for the Fundsource conference at the spiffy Fundsource website.

STOP PRESS! Mike Moore

Mike Moore is now a director of Broadlands. According to a recent release by Keryn Bartlam.

Mike will be best known to people in the life industry as a prime mover in the shift towards broking through his time at Royal Life. Mike is also a business partner of Andrew Hay in various ventures, and has recently launched a venture Broker2Broker - to facilitate the sale of brokerages.

Good Journalism on House Prices

I like this article on house prices because the last couple of paragraphs tells you clearly why you get differences between QV and the real estate peoples numbers.

QV's index construction is interesting. We took a look at www.qv.co.nz to check ou the index and how it works - its much better than tracking 'average' house prices. You can register as a casual user, and check it out for yourself. But the following is helpful:

Why does Quotable Value recommend using the QHPI?

Quotable Value  (QV) recommends using this index when commenting on sales trends, because it reduces the impact of extra-ordinary circumstances and low volume of sales, thereby providing a more robust indication of market house price trends.

There is a weakness in using average sales prices as a measure of value in the property market.  Average Sales Price can be a poor indicator when the sales volumes are low and particularly when the sales prices vary significantly.  With a low sales volume, a few sales of very high price properties can significantly impact the “average” price.

QV recommends the reporting of index movement rather than average sales prices.

How is the QHPI calculated?

Freehold open market sales are included.
The price to value ratio for each sale using net sale price and the rating valuation are calculated.
The price to value (p/v) ratios for the Territorial Authority are summed and divided by the number of sales to calculate the average p/v ratio.
The percentage change between the current average p/v ratio and the previous period’s average p/v ratio are calculated.
This percentage change is used to calculate the current period’s index for the Territorial Authority.

AXA and That Job

See-sawing over the Head of Sales job at AXA is about to come to an end. Being fair to Ralph, one of the more intellectual senior managers, its an important job to get right. I understand that having picked his man, he was asked to create a role for another candidate in order to fulfil a wider corporate staff development objective. All good stuff, but difficult to achieve. That has not now come to pass and we expect that John Lloyd will take on the role. We wish him well, it will be challenging.

Perverse Incentives

I am labouring under a perverse incentive. The nature of my bet to my IT guru pal Campbell is such that I win lunch (at the venue of my choosing) only if rates go up another half a percent before the end of June.

I am running out of time. YOU are probably all pleased.

Anyhow, ASB's economists have done a survey and they reckon people think now is a good time to buy a house... which should give Mr Bollard pause for thought!

Lunch is still going to be on me though. Unless something really big happens in a hurry...