Lender survey: Housing crisis persists due to lack of affordable developments
Builders’ reputations are becoming crucial in development and construction finance, results of the new Stamford Capital annual Real Estate Debt Capital Markets Survey has revealed.
The research also found that 82% of lenders have increased due diligence due to builder insolvencies and elevated construction costs. The heightened due diligence is causing significant delays in loan applications, with a 53% increase in processing times compared to two years ago. Despite this, 90% of lenders plan to expand their loan books.
“Lending appetite remains strong for developments with quality builders with plenty of liquidity in the market, while presale and ICR hurdles are moving in an expansive direction,” said Peter O’Connor (pictured), managing director of Stamford Capital.
Still, the housing crisis persists, with Stamford saying that a majority of developments are targeting the luxury market instead of affordable homes.
“There is a distinct lack of affordable new residential stock coming online,” O’Connor said. “Feasibilities just aren’t stacking up for more affordable developments given high land prices and increased construction costs in our major capitals.”
iCiRT's emergence as a key lending metric
Stamford Capital’s survey is the first to examine the impact of the independent iCiRT rating system on lending since its introduction in NSW in 2022. This system was developed following structural defects in the Mascot Towers development.
Recent ASIC insolvency data shows that 2,142 construction companies went out of business between July 2023 and March 2024, prompting more rigorous lender due diligence.
“Builder insolvency has been a huge issue for the industry to contend with, and while lender appetite remains strong, there is a lot more caution,” O’Connor said. “NSW’s iCiRT has removed the guesswork, minimised risk and delivered greater certainty for both lenders and buyers in NSW and sets an enviable benchmark for other states to follow.”
The survey shows rapid acceptance of iCiRT ratings, with a third of lenders already considering them or planning to in 2024. Additionally, 43% of these lenders have rejected loans due to poor iCiRT ratings.
“Reports of increasing attention to lending risk and development finance governance is welcome,” said NSW building commissioner David Chandler. “These reports come from both mainstream banks and non-bank lenders.
“More importantly, consumers are benefiting on many fronts. The growing uptake of iCirt ratings points to developer and builder trustworthiness. The growing presence of LDI and DLI 10-year warranty insurance points to building trustworthiness.”
The due diligence process now involves thorough analysis and stress testing of builder financials and engagement with third-party specialists to provide additional insights.
Affordable housing challenges
The survey also illustrates that lenders are less likely to back affordable housing projects due to tight profit margins from rising construction costs and land values. Nearly half of respondents cited construction costs as the biggest barrier to affordable housing, with land use regulation and planning, the cost of capital, and access to funding also noted as significant barriers.
The Producer Price Index indicates a 33% increase in materials prices for housing construction since 2019, with timber, ceramic products, and electrical equipment seeing notable price surges. With 39% of respondents expecting construction costs to rise further in the next 12 months, the focus remains on higher-priced luxury developments.
“From the lending perspective, it is hard to see when the housing crunch will ease. Fundamentals simply don’t stack up to develop new residential stock suited to entry-level buyers in our major capitals,” O’Connor said. “As a result, the pipeline continues to focus on more high-end product, with premium pricing – leaving first home buyers with little choice.”
The rise of non-bank lenders
Stamford Capital predicts increased lending appetite in 2024, with non-bank lenders expected to play a significant role due to increased private capital, contrasting with the more cautious approach of banks.
Non-bank lenders continue to grow in scale and market share in Australia, mirroring trends in the US and UK. According to Stamford Capital, non-banks now comprise a substantial portion of their transaction volume, reflecting a sharp increase from previous years.
Interest rate outlook and market overview
While many survey respondents expected interest rates to drop marginally by the end of 2024, the current outlook remains uncertain. Financial markets have adjusted their expectations for interest rate cuts following stronger-than-expected inflation data.
The commercial office sector shows signs of recovery, with 50% of respondents seeing a decline in office values, down from 63% last year. The retail market also shows positive signs, with 43% forecasting a recovery. However, the industrial market could be peaking, with 64% of respondents indicating it might have reached its apex.
Stamford Capital’s survey had more than 100 lenders, including major trading banks, non-bank lenders, super funds, foreign banks, private financiers, and second-tier trading banks, as respondents. Over 60% of the participants have loan books exceeding $500 million.
The survey, now in its eighth year, is a key indicator of lending sentiment and market trends. It provides insights into the impacts on Australia's debt capital markets over the past 12 months and offers forecasts for FY25.
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