We are all aware of the phrase ‘a perfect storm’ − an unusual combination of events that produces an extraordinarily large and bad situation.

Is a perfect storm brewing for the finance industry?

Traditionally as housing markets are increasing, interest rates start to rise to ease demand. During this time finance professionals generally rely more on the volume of housing transactions (new loans) for business. When the property market peaks and housing demand eases, interest rates are reduced to stimulate demand. This is when finance professionals generally rely more on re-finances as borrowers look to take advantage of the lower interest rates being offered.

And so the cycle continues. While there may be a slight ebb and flow in demand for the services of finance professionals over time, this cycle does not create unusually high peaks and troughs.

Add to this an unusual once in a hundred year event − the pandemic − and this traditional cycle has been thrown out of balance.

The pandemic has had a significant effect on the world economy, the impact being felt mostly by business owners. As a result, the Federal Government has been required to stimulate the economy with assistance schemes and the Reserve Bank has reduced interest rates to historical lows.

This fall in interest rates has resulted in a larger than ever number of borrowers looking to not only refinance their home loan, but also to lock in their interest rate (particularly given interest rates cannot go any lower). Never in our history have more than 20% of borrowers, let alone 50%+, locked into fixed interest rates.

At the same time, the population has been locked up at home unable to travel or participate in normal activities. As a result, they have looked at the suitability of their existing housing. The inability to go out has also meant many are no longer spending money on luxuries − and they add up. This has resulted in a desire to upgrade the family home, coupled with affordability associated with low interest rates, and the property market has taken off.

Now we have an unusual combination of events where both the housing market has taken off and interest rates have fallen sharply. This has created an unusually high peak in the demand for financial professional services.

What happens next?

Will the cycle revert to normal? Not sure if it is able to do so quickly. Many experts forecast that when the economy starts to rebound, interest rates will start to increase, housing affordability will decrease and the housing market will begin to stall.

We’ve already noted that when the housing market starts to stall and transaction volumes fall, finance professionals start focusing on re-finances. However, borrowers have already financed. More so they have also locked into fixed interest mortgages and are unable to re-finance again. This will create an unusually low trough in the demand for financial professional services.

The consequence will be an extraordinarily large and bad situation – a soft housing market and minimal re-finances.

Preparing for what is ahead is MORE IMPORTANT THAN EVER!

In this new environment, it is going to be difficult to generate new enquiries with little to no demand for your services.

Therefore, you need to be building your database of prospects now when your prospects are more likely to have interest and curiosity in your services. This is a much better approach than waiting for the market to soften when their interest will diminish.

When the market softens, your success will need to be created through the stimulation of this newly created database and their conversion, rather than relying on the generation of new leads.

 

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