Key Highlights

  • The maths that once made a mid-sized apartment project stack up has quietly stopped working.
  • Australia set itself a bold marker in 2024: 1.2 million new, well-located homes over five years under the National Housing
  • The headline explanation is cost.
  • The major banks have largely vacated mid-market construction lending, the $10 million to $50 million bracket that funds the townhouses,

The maths that once made a mid-sized apartment project stack up has quietly stopped working. With the major banks retreating and private Credit stepping into the gap at a higher price, developers are walking away from schemes the nation desperately needs built — and the government's signature housing pledge is slipping further out of reach.

Australia set itself a bold marker in 2024: 1.2 million new, well-located homes over five years under the National Housing Accord. Two years in, the target looks less like a stretch goal and more like a mirage. The National Housing Supply and Affordability Council forecasts a shortfall of roughly 262,000 dwellings, with no state or territory on track, and the projected completion date for the full target has already slipped to the end of 2030, some 18 months beyond the original mid-2029 deadline.

The headline explanation is cost. Construction expenses climbed a further 2 per cent in the June quarter and remain about 51 per cent above pre-pandemic levels, according to the council, which warned that rising costs "may reduce the financial feasibility of some housing projects." But beneath the cost story sits a quieter and arguably more corrosive problem: how those projects are financed.

When the banks walked away

The major banks have largely vacated mid-market construction lending, the $10 million to $50 million bracket that funds the townhouses, medium-density blocks and infill apartments making up the bulk of Australia's development pipeline. The reason is regulatory rather than commercial. Under the Basel Capital framework, construction loans Demand far heavier capital reserves than standard mortgages, nudging the banks toward lower-risk home lending and large corporate deals.

That retreat has handed the field to private credit. Non-bank lenders such as Trilogy Funds now finance a growing share of the projects banks overlook, and they move fast, with Loan offers sometimes issued within 24 to 48 hours. Speed and flexibility are genuine advantages. The catch is price: private credit is structurally more expensive than bank debt, and every additional percentage point of finance cost feeds directly into a developer's feasibility model.

The feasibility maths that no longer stacks up

This is the "brutal private credit maths" the AFR's Chanticleer column identified this week as quietly killing the housing targets. A project's viability turns on a narrow calculation: expected sale revenue, less land, construction, finance and Marketing costs, has to leave a Margin fat enough to justify the risk. Squeeze finance costs higher while construction costs rise and, critically, while dwelling values fall, and that margin evaporates.

The timing could hardly be worse. Capital city values had fallen 4.6 per cent from their peak by the end of August, and Commonwealth Bank is now forecasting a peak-to-trough decline of around 10 per cent. Falling end values shrink the Revenue side of the feasibility equation at the same moment finance costs are inflating the expense side. For many mid-market schemes, the numbers simply stop working, and unbuilt projects do nothing for a supply target.

The policy backdrop adds another layer of caution. The Albanese government's changes to negative gearing and the Capital Gains Tax discount, legislated to take effect from July 2027, carve out newly built homes to protect supply. Whether that concession is enough to offset weaker prices and dearer finance remains an open question, and Treasury's own modelling has pointed to a near-term reduction in dwellings of around 35,000, partly offset by government investment.

A supply problem the market can't solve alone

The uncomfortable conclusion is that the housing shortfall is now as much a financing problem as a planning or labour one. Private credit is filling a gap the banks created, but it cannot do so at bank prices, and the difference is showing up in projects that never break ground.

Investors and policymakers will be watching whether governments move to de-risk mid-market construction lending, through guarantees or concessional finance, or whether the 1.2 million target quietly becomes an aspiration rather than a plan. On current settings, the maths is not on the government's side.