HA Housing Insights: A lender’s perspective on the housing crisis

As seen on Harwood Andrews HA Housing Insights

 

“While federal and state governments have all made ambitious targets for housing delivery (1.2 million homes nationally by 2029 and 2.2 million homes in Victoria by 2051) and there are well-intentioned initiatives to reduce approval timeframes, there is still a lot of work ahead.”

— Bruce Wan, MaxCap Group

 

The housing crisis remains a critical issue in Australia

In this HA Housing Insights series, our social and affordable housing team speak with key industry experts – including developers, builders, community housing providers, investors and property and tax specialists – to gain a well-rounded perspective on the challenges faced in delivering housing outcomes and potential solutions.

Today we speak with Bruce Wan, Head of Research at MaxCap Group, to provide us with a lender’s perspective on the housing crisis.

Bruce is responsible for MaxCap Group’s market research and analysis and has a deep and diverse set of experience in global market research, economic analysis and investment strategy. MaxCap is one of the largest and longest-established non-bank lenders in Australia, with a sizeable portion of the $7 billion loan book dedicated to residential construction projects.

 

Q. What are your observations of the current market and emerging trends?

A. Amid all the disruptive economic events unfolding abroad, it is even more important for us to separate the noise from the signal and focus on the fundamental drivers that matter for the Australian housing market. In this context, we are actually seeing brighter prospects for the Australian housing market in 2025 and beyond.

Housing demand remains exceptionally strong. While population growth and immigration flows are likely to ease from record levels, we are still contending with a pace of housing demand that is running strong by historical standards and that is clearly outpacing housing supply. In turn, this persisting state of housing undersupply is supporting sustained growth in prices and rents.

The outlook for housing construction is improving. The big challenges for builders in 2022 – runaway cost escalations and high borrowing costs – are clearly subsiding in 2025. Building material cost inflation is much more muted. At the same time, the Reserve Bank is finally cutting official rates, improving developer sentiment and project feasibility. More rate cuts are being priced over the remainder of 2025.

Certainly, there are massive regional differences across the country. Housing markets in Perth, Adelaide and Brisbane are showing considerably stronger price gains, on the back of their firmer local economies. Meanwhile, the housing market in Melbourne is clearly lagging this cycle, weighed down by the lagging economic rebound, additional state taxes and weaker investor sentiment.

With a looming federal election, the political landscape is steadily becoming more accommodating. Indeed, there is increasingly vocal voter pressure to address housing availability and affordability. Consequently, there is bipartisan support for lifting residential housing construction, both at the state and federal levels of government, with a focus on value-adding infrastructure and streamlining approvals.

 

Q. What are the key challenges you are seeing in residential projects? What are the solutions?

A. After a difficult period for builders from 2022 to 2024, the biggest challenges for the housing construction sector – material costs and interest rates – are looking less daunting. In 2025, costs are stabilising, borrowing costs are edging lower, as developer profit margins slowly recover. That said, there are still many lingering challenges in terms of labour costs, skilled worker shortages and access to key contractors, but the broad outlook for housing construction is clearly improving.

While developers are keen and ready to go in 2025, the drawn-out planning process remains a key hurdle preventing a quicker supply response to Australia’s housing shortage. While federal and state governments have all made ambitious targets for housing delivery (1.2 million homes nationally by 2029 and 2.2 million homes in Victoria by 2051) and there are well-intentioned initiatives to reduce approval timeframes, there is still a lot of work ahead to reform the current planning and approval process.

Securing the funding to do this work is a critical factor for developers. From a project financing perspective, there is a big sustained structural shift towards non-bank lenders. Banks are still being mandated by the Australian regulator to assign the highest risk weightings for development and construction, particularly for non-conforming projects. In turn, borrowers are progressively shifting from bank to non-bank financing to access more timely and flexible funding for their projects.

 

Q. Is there any appetite for investors to invest in affordable housing?

A. Left to pure market forces, most residential developers are often more inclined to develop luxury (rather than affordable) housing, due to better profit margins. Simply, affordable housing is harder to do, as it targets a lower price point and requires keener discipline on costs.

Certainly, there is an increasingly urgent call for more affordable housing, particularly as housing affordability approach their cyclical extremes, reflecting the combination of rising house prices, elevated mortgage interest rates and subdued real household income growth.

In areas where we have seen good progress on affordable housing development, these projects are often incentivised by additional factors, either with direct government funding, public subsidies or improved development metrics like floor space ratios or building height.

From an investor perspective, some institutions have dedicated pools of capital targeting ESG strategies, with affordable housing sitting squarely in their “S” or social component. In other words, affordable housing strategies are often able to tap additional pools of ESG capital from some of these global institutional investors.

Ultimately, developers and investors are motivated by expected returns. In this context, improving the terms of these funding arrangements, either with greater affordable housing subsidies or improved development parameters, can be the vital catalyst needed to drive greater development activity in the affordable housing sector.

Lower interest rates are definitely a boost to the outlook. Residential construction is one of the most rate-sensitive sectors in the Australian economy and rate cuts in early 2025 (and market expectations for more) will provide a handy uplift to activity. At the same, volatility and uncertainty in global share markets – amid an unfolding trade war – are encouraging more investors to keep their capital closer to home, especially when there is a clear, profitable opportunity to address the local housing crisis.

 

Q. Is MaxCap Group involved in any projects in the affordable housing/build-to-rent space? If so, what makes these projects attractive?

A. MaxCap is one of the largest and longest-established non-bank lender in the country, with a sizeable portion of the $7 billion loan book dedicated to residential construction projects. At any given time, there are multiple developments that are build-to-rent or carry some social housing component.

From a lender’s perspective, we are keen to support the living sector in all its many forms, whether that is build-to-sell, build-to-rent, land subdivision, affordable housing, coliving, student accommodation or hotels. In Australia, the bulk of this opportunity set still revolves mostly around traditional build-to-sell apartment blocks. The overall share of the build-to-rent market is still relatively tiny, but it is growing rapidly. The affordable housing component is becoming a little more prominent, particularly within larger residential projects, but it is still mainly dictated by the degree of subsidies and incentives on offer.

For many affordable housing and build-to-rent developers, the biggest challenge for them is the competitive construction landscape. Indeed, build-to-rent projects are disadvantaged in their ability to bid for sites. Build-to-sell developers have better capacity to pay and better liquidity overall, particularly as they can pre-sell their product piecemeal. Build-to-rent investors often need to accept lower returns across a longer timeframe, which requires an uncommon form of patient investment capital. Meanwhile, the generally smaller scale of many affordable housing projects – sitting below the minimum deal size thresholds – preclude them from accessing the major lenders.

Ultimately, the solutions to these challenges will need to come from policymakers. Given a clear and urgent need for all types of housing, especially affordable rentals, there is a strong economic case to be made for better support to these affordable and rental housing projects.

 

Q. From our experience, frequently the capital stack for social and affordable housing projects does not add up resulting in projects falling over. Can you elaborate on this and why this is happening?

A. The fundamental issue remains, social and affordable housing projects are less profitable on a purely commercial basis. There is a persistent gap in returns between affordable housing and regular development projects, reflecting the lower price points and the more stringent restrictions on costs. For social and affordable housing projects to get off the ground, it is always necessary to bridge that returns gap with some form of subsidies or incentives.

With a looming federal election before May 2025, some of these schemes are up in the air. For example, the future growth prospects of the $10 billion Housing Australia Future Fund dedicated to social and affordable housing will likely depend on the outcome of the federal election. The cloud of uncertainty that hangs over these programs does not help developer confidence in this space.

 

Q. What incentives would make these projects more attractive to developers and investors?

A. For the policymakers, developers and investors in the affordable housing sector, there is generally a good understanding of what is needed to accelerate activity in this sector. This includes greater direct funding or indirect subsidies for developers (to close the returns gap), streamlined approval processes (to get projects up and running) and more generous floorspace and height parameters (to incentivise this segment).

In our view, quicker approval processes would clearly be the top catalyst for incentivising more affordable housing projects right now. Giving a ‘priority lane’ to approving affordable housing projects (or mixed use projects with a significant affordable housing component) within general planning queues would be a substantial carrot for developers. Of course, saying all of this is relatively easy, but actually implementing these enticements have proven to be much harder.

 

The information provided in this article is for general informational and conversational purposes only. While we strive to ensure the accuracy and relevance of all content, we make no guarantees about the completeness, reliability, or suitability of the information for any particular purpose. The views and opinions expressed in this article or associated materials are those of the respective contributors and do not necessarily reflect the views of Harwood Andrews or any of its affiliates.