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Australian reverse mortgage market hits hurdle in 2007

14th November 2007
By IB Staff Writer

After several years of strong growth, the Australian reverse mortgage market has slowed down considerably in 2007. Indeed, a rising interest rate environment, combined with uncertain property prices and exacerbated by global credit concerns, has led to decelerating growth rates. However, the outlook for the future is still bright.

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The Australian reverse mortgage market is currently oversupplied with lenders. Competition has increased and margins have tightened, and some lenders are expected to exit the market. However, long-term prospects for this product are still favorable.

Reverse mortgages have been slow to catch on

Reverse mortgages are loans secured against property for senior homeowners, which usually require no repayments until the borrower moves out or dies, and instead feature compounded interest added to the loan. Although reverse mortgages and other equity release products have been around for a long time, the products have never entered the mainstream and are still only used by a small minority of eligible seniors. Of almost two million eligible Australian households, only around 31,500 currently have a reverse mortgage, corresponding to a 1.6% market penetration.

Total reverse mortgage advances in Australia grew from A$239 million in 2004 to A$624 million in 2006, corresponding to an average yearly growth rate of 61.7%. In 2007, total reverse mortgage advances are expected to reach A$660 million, which only corresponds to 5.8% growth over the previous year. This stagnation was caused by a combination of interest rate rises, concerns over the global credit environment and an uncertain property market.

The Australian market is oversupplied with lenders

The Australian reverse mortgage market currently has around 26 lenders, up from six providers in 2004. Industry sources reveal that the market would have to be three to four times as large in order to profitably sustain this number of lenders. Increasing competition and shrinking margins have put additional pressure on lenders, leading industry insiders to predict some market exits in 2008.

However, the long-term prospects for reverse mortgages are still very favorable, given the solid underlying fundamental growth factors. As a larger proportion of the population faces retirement insufficiently prepared, and as a larger proportion of wealth is held as equity, products monetizing equity will inevitably become more common. According to Datamonitor forecasts, reverse mortgage advances will reach A$1.2 billion in 2011, corresponding to an annual average growth rate of 15.5% from 2007.

Three long-term factors point to a brighter future for reverse mortgages

There are three main long-term factors suggesting that reverse mortgages are set to become more common in industrialized countries. These are an aging population, insufficient retirement incomes and equity wealth. Most developed countries have an aging population and improving public health, which will continue to make senior citizens' final years more active. In many developed countries, pension contributions have not kept pace with the aging population. Moreover, the last decade has seen a global property boom, with residential properties soaring in price in developed economies across the world.
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