While the Greens and Coalition have delayed a decision on the implementation of the $10 billion Housing Australia Future Fund (HAFF), the housing crisis remains Australia's most pressing social issue.
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Fixing the issue of housing undersupply can't be solved with a single silver bullet. It needs to address a complex set of social, economic, policy and political factors, which in time will undoubtedly be solved and rebalance the market's ability to deliver housing.
A critical factor that needs consideration, however, is how the funding will be sourced to deliver the new housing supply that we so desperately need.
Economist estimates indicate that the housing shortfall at the end of FY22 was close to 70,000 dwellings, a figure supported by our extremely tight rental vacancy figures. In addition, the National Housing Finance Investment Commission (NHFIC) published forecasts in April this year suggesting that Australia would need approximately 1.8 million new homes to be built over the next decade.
With an average requirement of 180,000 new homes a year just to keep up with new demand, and considering that we also need to make up the existing housing shortfall, that is a significant annual cost.
Government funding from initiatives like the HAFF and the recently announced $2 billion social housing state grants will be needed to subsidise the development of social and affordable housing specifically, as this segment of the market is otherwise not catered for by private capital. However, this is a relatively small proportion of the housing that will ultimately be needed, so private sector funding of both debt and equity is going to be essential.
The equity required will be attracted if the returns are sufficient, but active and liquid debt markets are necessary to create those returns. The major banks are, and will continue to be, a significant source of funding, however it seems increasingly unlikely that they will be able to expand their capacity enough to cover the capital shortfall required to build the homes needed.
As an essential part of our financial system that need to be safe places for us all to store our wealth, the major banks are subject to significant regulation by the Australian Prudential Regulation Authority (APRA). These regulations have evolved and tightened significantly since the GFC.
One of the impacts of these tightening regulations appears to have been the reduction in appetite of the major banks to lend to residential property development. APRA data shows that the major banks lending to residential development as a proportion of total lending to all property (excluding consumer mortgages) has decreased from approximately 30 percent pre-GFC to 18 per cent today.
Combined with this, banks have fairly rigid funding criteria for residential development loans. Some of these, such as requiring a significant portion of pre-sales for funding apartment developments for example, are becoming harder for developers to achieve in the current market. This limits the number of developments that will qualify for funding from the major banks.
Finally, the economic environment is expected to become more challenging for banks should there be an economic slowdown. With interest rates rising, bank funding costs are increasing and the risk of loan defaults during downturns is also increased. Further, there is a risk of bank deposit levels drifting downwards as either household savings are used to cover increased costs of living, or deposit holders take advantage of other options that pay higher rates of interest. These would all be expected to reduce banks' capacity to lend generally.
So how might non-bank lenders act to help fund our housing shortfall? By providing developers with equivalent but more flexible funding options than the major banks.
MORE OPINION:
While it's difficult to calculate the market share non-bank lenders have captured in property development funding, it is a sector that has grown and matured significantly over the last decade and is now a multi-billion-dollar industry. In the early years, the industry focused on providing loans to 'unbankable' borrowers, or for more risky loans like mezzanine debt. However, in recent times the major banks have, for a variety of reasons, ceded significant market share for development funding to non-bank lenders. In fact, these days we see many residential developers actively choose to obtain funding from non-bank lenders.
As the industry has matured in Australia, global institutional capital has been attracted to the sector. This has expanded the funding base of non-bank lenders significantly and provided further capacity for the sector to grow without the regulatory shackles that banks are rightly required to operate under. As such, given the funding needs for housing over the coming decade, it is important that this industry is fostered and remains vibrant.
As we work to solve the many issues that we face in delivering more housing, the solution is going to require a concerted and coordinated effort from several different stakeholders. Given the scale of the funding need, non-bank lenders are clearly going to play a vital role in helping to house the nation.
- David Giles is director of strategy at Dorado Property and co-founder of Australian Residential Properties
