Australia’s banks hold $2.5 trillion in home loans, while development finance carries far heavier capital costs. Is credit worsening the shortage?
The Australian housing crisis is usually explained through planning delays, migration, construction costs and a shortage of skilled workers.
All of those factors matter.
But there is another part of the system that receives less attention: Australia is very effective at financing the purchase of completed homes and much less effective at financing the risky process of creating them.
A bank can issue a mortgage against an established property with a valuation, a borrower’s income and decades of repayment data behind it. Financing land acquisition, apartment construction or a new housing estate is different. The lender must take construction risk, cost risk, sales risk and developer risk, often years before the finished homes produce revenue.
That difference is rational at the level of an individual bank.
Across the whole economy, however, it can produce an uncomfortable result. Credit helps more buyers compete for the existing housing stock while new supply remains slow, expensive and difficult to fund.
The banking system did not create every part of the shortage. But the way credit is allocated may be reinforcing it.
The Australian housing crisis is also a credit problem
The scale of Australia’s mortgage system is difficult to ignore.
APRA reported that authorised deposit-taking institutions held approximately $2.51 trillion in residential property credit at the end of March 2026. Commercial property exposures, which include far more than residential development, were about $488 billion. Development and construction lending is only one part of that smaller commercial category. (APRA)
These figures are not a perfect comparison. Commercial property includes offices, shops, warehouses, completed investment assets and developments. Residential credit includes owner-occupier and investor mortgages.
They still show where the weight of the system sits.
Banks have built large, highly standardised mortgage operations. Applications can be assessed using income, expenses, credit history, valuations and loan-to-value ratios. The finished home provides security from the day the loan settles.
A development loan cannot be processed in the same way. There may be no completed asset, no rental income and no guarantee that projected sale prices will be achieved. A small cost overrun, approval delay or fall in presales can change the entire project.
In plain English
Australia has a financial system that is very good at lending against homes that already exist. It is less willing, and required to hold more capital, when lending against homes that still need to be approved, built and sold.
That does not mean banks should ignore risk.
It means housing policy cannot focus only on how much buyers can borrow. It must also ask whether viable projects can obtain finance on terms that allow homes to be delivered.
Why APRA makes development lending more expensive
Banks must hold capital against the possibility that borrowers do not repay them.
APRA uses risk weights to help determine how much capital is required for different types of lending. A higher risk weight generally means the bank must commit more capital to support the loan, making that lending less attractive or more expensive.
Under APRA’s standardised framework, qualifying owner-occupier principal-and-interest mortgages with lenders’ mortgage insurance can receive risk weights starting at 20 per cent, depending on the loan-to-value ratio. Other residential mortgages receive higher weights as leverage and risk increase.
Land acquisition, development and construction lending is treated differently. A qualifying residential development exposure can receive a 100 per cent risk weight if strict debt and presale conditions are met. Other development and construction exposures generally receive a 150 per cent risk weight. (APRA)
That gap matters.
A bank does not compare loans using the interest rate alone. It also asks how much scarce capital the loan consumes, how uncertain the repayment is and what return shareholders receive for taking the risk.
A standard mortgage may therefore offer a more attractive risk-adjusted return than a complex development facility, even where the development would add dozens or hundreds of homes.
This is not necessarily evidence that APRA’s rules are wrong. Development lending is genuinely riskier. Construction can stop. Builders can fail. Presales can disappear. Costs can jump after a contract is signed.
The problem is the combined outcome.
When every bank responds rationally to the same capital and risk settings, the system can produce plenty of finance for purchasing existing assets and too little patient finance for producing new ones.
A loan cannot rescue a project that does not stack up
Changing the capital rules would not automatically produce more homes.
A project proceeds only when its expected revenue comfortably exceeds the cost of land, construction, consultants, infrastructure, government charges, finance, marketing and an adequate developer margin.
That margin is not simply a windfall. It compensates the developer for years of capital exposure and the risk that prices, costs or market conditions move in the wrong direction.
Consider a project expected to generate $100 million in sales.
If the land, building, finance and other costs total $80 million, the project may have enough room to proceed. If those costs increase to $94 million while achievable selling prices remain unchanged, the apparent profit may no longer justify the risk.
The site still exists. Planning approval may still exist. Buyers may still need the homes.
But construction does not begin.
The latest ABS figures show how fragile the pipeline remains. Total dwelling commencements fell 11.2 per cent in the March 2026 quarter to 48,012. Starts for apartments, townhouses and other higher-density housing fell 20.7 per cent. (Australian Bureau of Statistics)
This is why simply ordering banks to lend more would be dangerous.
More credit supplied to an unviable project does not make the project viable. It can delay failure, increase losses and leave purchasers, contractors and lenders exposed.
Australian Property Review has previously examined how rising construction costs are pushing already-thin housing projects closer to the edge. Finance is part of the equation, but it cannot compensate indefinitely for costs rising faster than end values.
Demand can move quickly. Supply cannot
The imbalance becomes clearer when the two sides of housing policy are compared.
A lower mortgage rate can increase borrowing capacity almost immediately. A guarantee or deposit assistance program can bring buyers into the market within months. An investor incentive can change demand as soon as the rules are announced.
A new apartment building may take years.
The land must be acquired, rezoned or approved. Infrastructure must be available. Finance must be secured. Presales may be required. A builder must be contracted. Construction then needs to survive weather, labour shortages, material delays and cost escalation.
The National Housing Supply and Affordability Council estimated that around 263,000 dwellings were completed during the first 18 months of the Housing Accord period. After demolitions, that represented approximately 232,000 net additional dwellings, below estimated new underlying demand of about 287,000 homes over the same period. (NHSAC)
Its early-2026 outlook projected about 980,000 gross new homes over the five-year Accord period, well below the 1.2 million target. Under that projection, the target would not be reached until the September quarter of 2030, more than a year after the Accord period ends. (NHSAC)
The latest fall in commencements has added another warning.
As Australian Property Review recently reported, the Housing Accord’s runway is becoming shorter as new dwelling starts weaken.
Population growth adds to this pressure, although it should not be treated as the only cause. Net overseas migration was approximately 301,000 in the year ending December 2025, down from the recent peak but still a significant source of new housing demand. (Australian Bureau of Statistics)
Migration contributes workers, consumers, students and economic activity. It also increases the number of people requiring accommodation.
The practical policy issue is capacity. Population, buyer assistance and credit growth must be considered against the number of homes the construction system can realistically complete, not against an aspirational target.
When demand adjusts faster than supply, much of the benefit from easier buyer finance can be absorbed into land and established home prices.
The overlooked role of private credit
Where banks step back, other lenders often move in.
The RBA estimated that Australian private credit funds had around $50 billion in credit outstanding by December 2025, while noting significant data gaps. The sector is particularly concentrated in real estate and has probably funded developments that could not obtain conventional bank finance. (Reserve Bank of Australia)
This can be useful.
Private lenders may accept more complex projects, move faster and structure loans around circumstances that do not fit a bank’s standard policy.
Here’s the catch.
That flexibility normally comes with higher interest rates, establishment fees, stricter covenants and shorter repayment periods. Those costs enter the development feasibility and ultimately affect either the selling price, the developer’s margin or whether the project proceeds.
Private credit can fill part of the funding gap. It cannot cheaply replace a banking system with a multi-trillion-dollar balance sheet.
It also needs appropriate oversight. Shifting risk outside regulated banks does not make the risk disappear.
Would changing APRA solve the shortage?
Revisiting the treatment of development lending deserves consideration, but bluntly lowering capital requirements would create another problem.
Development loans carry higher risk for a reason. Removing the protection without reducing the underlying risk could encourage poor projects, weaken credit standards and produce losses during the next downturn.
A stronger approach would reduce the risk attached to producing homes.
Make viable projects easier to identify
Governments, banks and regulators could create clearer eligibility standards for lower-risk housing developments.
A project with planning approval, verified infrastructure, experienced counterparties, realistic presales and transparent cost contingencies should not be treated in the same way as a speculative land acquisition dependent on optimistic future rezoning.
Better data and consistent project reporting could help lenders distinguish between the two.
Share specific risks without guaranteeing profits
Targeted government guarantees or risk-sharing facilities could support developments that are economically sound but cannot obtain affordable senior finance.
Any support would need strict limits. Taxpayers should not insure poor land purchases, unrealistic sales forecasts or excessive developer leverage.
The objective should be to bridge identifiable financing gaps, not protect every project from commercial risk.
Reduce the costs before adding more debt
Planning delays, infrastructure charges, insurance, taxes and uncertain approval timeframes all increase holding costs.
A developer paying interest while waiting for an approval must recover that cost somewhere. It may appear later as a higher sale price, a smaller apartment, a reduced margin or a cancelled project.
Finance reform will achieve little if every other cost continues moving against delivery.
Match demand programs to completed supply
Buyer assistance is politically attractive because the benefit is immediate and visible.
Supply reform is slower and more difficult.
Governments should publish the expected demand impact of major buyer programs alongside credible estimates of how many additional dwellings the policy will help deliver. A program that adds purchasing power without expanding supply may help an individual buyer while making the broader affordability problem harder.
That is the trade-off housing policy often avoids.
The bank-share risk is real, but it is not a crisis signal
Australia’s mortgage concentration also matters beyond property.
Major banks occupy a significant place in the sharemarket and in many superannuation portfolios. A prolonged housing slowdown could affect loan growth, transaction volumes, arrears, margins and investor expectations.
That does not mean a banking crisis is imminent.
APRA’s March 2026 figures showed residential non-performing loans at 0.99 per cent and the banking sector’s total capital ratio at 20.3 per cent. Current asset quality remains substantially stronger than the more dramatic housing commentary often implies. (APRA)
The more credible risk is valuation.
Bank shares can weaken because earnings grow more slowly, competition compresses margins or investors demand a lower price for housing exposure. Banks do not need to become insolvent for shareholders or index-based super portfolios to record losses.
Australian Property Review explored that distinction in its analysis of the large short positions being taken against Australian bank shares.
For property investors, the second-order effect is credit availability. Banks facing weaker conditions may tighten serviceability, require larger equity contributions or become more selective about locations and property types.
That can slow housing demand even where the underlying shortage remains.
What buyers and investors should take from this
The housing shortage may support prices over time, but it does not remove individual risk.
A buyer can still overpay. An investor can still face poor cashflow. A new-build purchaser can still experience delays. A development-heavy location can still receive too much supply at the wrong price point, even while Australia remains undersupplied nationally.
Start with a practical stress test.
Model your position with an interest rate one percentage point higher, weaker rent growth, a temporary vacancy and a modest fall in the property’s value. For an off-the-plan purchase, also consider whether settlement would still be possible after a six or 12-month delay.
For investors looking at new housing, examine the developer and builder, not just the brochure. Ask whether construction finance is unconditional, what level of presales is required and how cost escalation is handled.
The national shortage does not guarantee that every project will be completed or that every new property will perform.
Australia needs to finance delivery, not just demand
The claim that banks fund mortgages rather than new homes is an oversimplification.
Banks do fund housing development. APRA does not prohibit that lending. Planning, construction costs, labour shortages, infrastructure and project feasibility can be just as important as capital rules.
But the claim points to a real imbalance.
Australia has built a large, competitive and efficient system for financing purchases against completed residential property. The funding system for creating new dwellings remains smaller, more expensive and exposed to risks that governments have struggled to reduce.
The solution is not reckless lending.
It is a coordinated shift towards reducing development risk, improving access to finance for sound projects, strengthening competition and measuring housing policies by completed dwellings rather than money announced or buyers assisted.
Until that happens, Australia may continue helping households borrow for scarce homes faster than the economy can build them.
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General info, not financial advice.
