The growing problem facing Australia’s ‘broken’ housing market
Australia’s “broken” housing market, which left every major city except Gold Coast and Canberra undersupplied last year, faces a growing problem as the private credit sector piles into developments that may never be completed, property advisory firm Charter Keck Cramer says in a new report.
While larger private credit providers with track records had expanded into real estate development, a pool of smaller providers had jumped into projects in recent years, promising higher but riskier returns, the consultancy said.
“There are more lenders coming into that space, but there are more projects in financial difficulties,” Charter Keck Cramer national executive director Richard Temlett said.
“A bunch of them are in distress. They’re not viable and it’s cost of delivery, an increase in building costs, the number of taxes, charges, levies – they’re not financially viable.”
The lack of transparency around the risks and performance of private credit prompted the Australian Securities and Investments Commission to warn investors last month about the risks of losing wealth in the $150 billion market.
The biggest risk for the housing sector, Temlett said, was that collapsed projects could hit confidence in developers and the financiers needed to make these happen, just as sentiment was just starting to improve.
“A loss of confidence in private credit would be wrong,” he said. “Private credit is highly educated for the most part. It allows customisable and flexible solutions to allow projects to get built. We need more of it. Standard bank financing won’t cut it.”
One of the few larger non-bank lenders sounded relaxed about the issue.
“It’s the 80-20 rule,” Merricks Capital executive chairman Adrian Redlich said.
“The majority of capital sits with the bigger players. The big players are well-positioned to assess the risk. The industry’s not going to be starved of capital.”
The Charter Keck Cramer report says apartment completions fell last calendar year in most cities, leaving the national pipeline at decade lows.
Traditional build-to-sell apartment completions fell 36 per cent to 4800 in Melbourne, and were down 57 per cent to 1020 in Brisbane. They were also down 16 per cent to 1250 in the Gold Coast and more than halved in Adelaide to 180.
The consultancy’s State of the BTS and BTR Apartment Market Report H2-2024 shows completions rose 13 per cent to 10,100 in Sydney, jumped 153 per cent to 1850 in Perth and gained 45 per cent to 2530 in Canberra.
‘Very bad for housing affordability’
Only Canberra and the Gold Coast reached a level of apartment completions last year to meet their city’s needs. Despite its overall jump, Sydney needed to build up to four times last year’s total each year to meet demand, Temlett said.
“For such a beautiful city to only build that amount is very bad for housing affordability,” he said.
Although new supply was likely to remain at decade lows for the next three to four years, it would start improving this year or next as lower borrowing costs prompted more sales at higher prices, Temlett said.
Mirvac’s head of development, Stuart Penklis, agreed. Last month, the ASX-listed developer said sales inquiries rose 36 per cent in the six months to December from a year earlier and this week, Penklis said that strength was continuing in the current trading period.
“Without question there is improved sentiment,” he said, after the developer kicked off the construction of its $292 million, 167-unit Prince & Parade development in inner-northern Melbourne’s Brunswick. The project is 40 per cent pre-sold.
“We’re only two months in and part-way through the third month [of the second half] but we have seen a continued uptick in inquiry,” Penklis said.
Temlett said the build-to-rent apartment pipeline grew last year as the country’s four largest banks lent more and offshore investors – many from Japan – showed greater enthusiasm because of the tax equalisation for the managed investment trusts they use to invest.
Build-to-rent apartment completions jumped fivefold in Melbourne to 3140 in the previous calendar year and quadrupled in Brisbane to 320. Even Sydney, a city where the sector has long struggled to make projects viable because of high land costs, completed 1280 apartments.
Private credit expanded into real estate development between 2021 and 2023 as the big four banks limited their finance to a new housing market that Charter Keck Cramer said had “broken down” as a result of a dramatic rise in construction costs.
In many cases, private credit providers had started offering only a small part of the financing needed for a development, such as bridging finance, but had increased their exposure to the project as it refinanced.
Lenders had stepped in and taken over the management of some projects from developers, but some were putting their investors at risk, Temlett said.
“Our view is that pricing revenues are unlikely to move significantly in many sub-markets throughout 2025 and financiers will need to revise their returns on these projects to exit the investment before eroding any equity,” he said.
