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Amid Australia's housing shortage and competitive property markets, some would-be homeowners have come up with an unorthodox solution: simply build their own. Except it's not that simple.
Rising construction costs and labour shortages have made it difficult to build. Zoning approvals can also be challenging. In addition, taking out a construction loan to build your own home often comes with a higher price tag in the form of increased interest rates, compared with a traditional home loan. But some residents feel they have no other choice, while developers who can pull it off are seizing the opportunity.
"It's sort of the perfect storm of people trying to make it work," Chris Hall, founder and managing director at Blue Crane Capital, told Australian Broker. "There's an opportunity [to build], but there's a few headwinds, and that's around construction costs and a labour shortage. The construction piece [is expensive], but there's such a big demand for housing as well because there's a housing shortage. We've got a lot of migrants coming into the country and we don't have enough homes, which is causing property values to go up. So it's not easy to do. But there's more interest in activity from people trying to make it work."
The demand for residential development and duplex construction loans, as well as commercial property finance lending, is increasing at the Sydney-based firm, Hall said.
"Particularly since the start of the year," he explained, adding that new zoning laws in New South Wales, which allow new homes to be built around certain train stations, has also piqued developer interest.
"The challenge is that the government wants to build more houses, but borrowing capacities are difficult because the interest rates have gone up and the cost of constructions has gone up considerably, as well, with inflation," Hall said.
In 2023, the National Housing Accord set an ambitious plan to build 1.2 million new homes in Australia by 2029. In January of this year, the total number of new buildings approved to be built rose 6.3%, month-over-month, according to the Bureau of Statistics, or up 21.7% on a yearly basis. While that might still not be fast enough to meet the Housing Accord's 2029 deadline, it does still indicate an increased need for construction - and construction financing.
Adding to the problem are conflicting headwinds and tailwinds. In February, the Reserve Bank of Australia (RBA) reduced the official cash rate (OCR) by 25 basis points to 4.10%, helping increase borrowing capacities. But construction costs are still on the rise. Residential construction costs rose 3.4% in the 12 months leading up to December 2024, according to CoreLogic data.
"There's an opportunity to build when there's low supply. I mean, it's a great opportunity to get in the market," said Tim Lawless, head of research at CoreLogic Asia-Pacific. "But it's occurring at a time when it's really expensive to do that. Not only do you have really high purchasing costs when you're buying into a market, your taxes on stamp duty and so forth are quite high and then you've got really elevated building costs as well. So this is the paradigm we're in, where it makes a lot of sense to be investing in development sites. But at the moment, the holding costs are high and development costs are really high as well. It's just getting the feasibility to stack up is the missing piece to the puzzle.
"I'm not sure how those conflicting forces are going to pan out," he added. "If you're in a great situation where you're not in debt and you have a lot of capital behind you, it's a fantastic opportunity."
Either way, whether it's those lucky ones who are jumping into the construction market, or folks who have fallen victim to the housing crunch, the appetite for both residential and commercial construction loans is on the rise.
Chris Meaker, director, head of sales and distribution at non-bank lender Brighten, said the biggest surge in demand he's seen at his firm is from self-employed borrowers applying for construction loans.
"Especially over the last 12 months," he said. "The construction market is increasing, without a doubt."
Non-bank lender Orde Financial started offering a similar residential construction loan product last August. Grant Smith, the firm's deputy chief lending officer, said the business has steadily increased month over month. As of February, construction loans sit at about 5% to 10% of the company's total originations.
"There's been a clear feedback loop from our brokers wanting this product as a solution," he said. "The growth and need in the Australian economy for construction lending is going to be huge in this next [five year] period. It's really a supply constraint issue."
And it's not just alternative lenders who are seeing appetite for construction intensify. Adam Brown, broker distribution executive at National Australia Bank (NAB), said he's noticed high levels of construction across the country despite clashing narratives.
"It's still more expensive to build than it ever has been. But the scarcity of resources and the scarcity of material, and the really inflated costs of things that we saw through COVID[-19], and the back end of COVID[-19] have now normalized," Brown said. He added that Australia's growing population is also contributing to the growth of construction loans.
"If we are going to meet the projected growth in population that we see, we're going to have to build more housing, whether that's a combination of public and private investment," Brown said.
Still, residential homeowners and developers alike have to weigh the costs to see if it's worth the investment.
"You've got to look at the economics of doing construction and say, how much money is being put to work? What's the return on that? And will people be able to afford the end product?" said Chris Wyke, co-founder and co-chief executive officer of alternative asset management firm MA Financial. "It becomes a tougher mathematical equation with the increasing costs that we've seen on construction materials. The loans are available. But the cost of developing might mean I won't be able to sell the end product because it's too expensive for the consumer, therefore I won't go ahead with it."
