The Australian construction finance market finds itself at a crossroads, buffeted by tough conditions and facing significant uncertainty across parts of the sector.

“[It’s] shaky at best, and it has been for some time now,” says Blake Buchanan, general manager at Specialist Finance Group. “Australia’s construction finance landscape has experienced notable shifts characterised by rising costs, labour shortages and bureaucratic overreach, which increases risks for lenders in this space.”

Developers and lenders must thread the needle between the industry’s potential revival and continued disruption.​

“It’s no surprise that the construction finance landscape in Australia has become more complex over the past year, shaped by economic slowdowns, policy interventions, labour market challenges and evolving financing patterns,” says Jason Lucas, head of sales for commercial lending at Assetline Capital. 

ASIC insolvency statistics show that insolvencies in the construction sector surged to more than 3,000 in 2024 – a 26% increase on 2023 and a whopping 44% jump from 2022. At the same time, the total number of new loan commitments for dwellings fell by 0.4% in the December quarter of 2024, while their value rose by 1.4%. Notably, owner-occupier loan commitments increased, whereas investor loan commitments declined, reflecting shifting dynamics in housing finance.

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A 21.7% rise in residential approvals in January compared to the same month last year shows an uneven recovery is occurring, with both opportunities and concerns for lenders and developers. This comes after concerns that the level of approvals in 2024 were below long-term averages.

The approvals recovery has been strongest in states experiencing robust population growth, including NSW, Victoria, Queensland, WA and South Australia, though the overall picture remains complex.

The house versus apartment divide

A divergence is occurring between house and apartment project approvals, with the latter showing stronger growth momentum.

While the volatile private sector dwellings excluding houses segment increased 12.7% month-on-month, the more stable private sector houses category rose just 1.1% after a 2.8% decline in December. This leaves house approvals lower than six months ago, suggesting potential headwinds for smaller builders and contractors.

Lucas notes that Assetline Capital has adapted to these market conditions. “We’ve introduced more credit options to cover a broad range of construction projects and situations at all parts of the construction life cycle. For smaller projects and first-time developers, we’re offering support and expertise to navigate the market with no servicing on our development finance loans and flexible drawdown schedules at each build stage. This in turn keeps their cash flow steady and, ideally, stress at bay by knowing they are well supported with us as their chosen funding partner.”

According to CreditorWatch, the softening in house approvals likely reflects some overhang of stock, with builders discounting project homes in recent months. Meanwhile, larger apartment projects appear to be benefiting from easing construction material prices (especially steel) and government support initiatives.​

“As a result, developers are more and more being turned away from their usual providers due to heightened scrutiny and increased pre-finance conditions to mitigate the current market risks,” says Buchanan. “This is resulting in a swing to challenger lenders inclusive of private providers.” ​

This mixed recovery presents a challenging environment for construction finance providers attempting to manage risk while supporting sector growth.

Lender scrutiny remains high, but rates may offer relief

Despite any nascent signs of improvement, financial institutions continue to exercise caution in their lending practices for construction projects.

“We are seeing many more lenders scrutinising the builders and developers as a part of the approval process,” says Buchanan. “They are not only weighing up the normal challenges with these loan types but also taking measures to get comfort with the builders’ business practices and financial viability.”

While lenders remain cautious, some other factors may offer hope. Insolvencies for January and February of this year appear to have dropped below levels seen in the same months last year, and further cuts to interest rates by the Reserve Bank of Australia are expected. This monetary easing, combined with moderating construction materials prices, could provide much-needed support.

Producer Price Index data shows that while the cost of many construction materials continues to rise, the pace is much slower than the double percentage point jumps seen in 2022. But regional variations are also in play, particularly in areas like Sydney, where strong demand for labour and materials, coupled with supply chain issues and global inflationary trends, continue to drive construction costs up.

In a market with such mixed signals, expert advice is worth its weight in gold. “Education, awareness and the provision of tools for our brokers enables them to both assist in the structuring of loan submissions but also engage with the right partners to place it with,” says Buchanan. “As an aggregator, our role is to ensure our brokers have access to best practices and strategies to assist their clients.”

Adapting to mixed market conditions

Brokers and lenders are adjusting their strategies to account for the changing interest rate environment while remaining cautious about construction sector risks. Likewise, finance providers are expanding their capabilities to address the divergent trends in the housing market.

Lucas elaborates on Assetline Capital’s approach: “In the last year, we have introduced a low-doc construction product that provides borrowers with financing up to $5 million and up to 70% LVR for a loan term of up to 18 months. This sub-$5 million product provides a tailored solution for the ground-up construction of houses, duplexes, townhouses and structural renovations.”

For those projects that do get the green light, support is robust. “Assetline Capital is uniquely positioned as construction experts to help ensure the success of the developments and projects we are involved with,” Lucas says. “We not only provide flexible financing options but hands-on support through each project, development and deal.” 

A rapidly changing environment demands constant evaluation. “SFG has a huge panel of lenders as we know how diverse our brokers’ clients can be,” says Buchanan. “We are always assessing trends and market conditions and aligning with partners who can assist with these needs. We like to forecast and have the solutions available for our members when needed – such as the addition of lenders who will take partially completed projects when a builder falls over.” 

This flexibility has become essential as the recovery remains uneven across different segments of the construction market, with particular concern for smaller builders focused on house construction.

As the disconnect between housing policy goals and on-the-ground realities continues to create friction, some organisations are also leveraging technology to navigate the complex conditions.

“Our market-leading tech enables brokers to intertwine customer experience journeys with their business process map for a seamless experience that brings the wow factor,” says Buchanan.

Lucas adds that over the last 12 months Assetline Capital has developed “a real-time in-house project management software platform that assists our Construction Portfolio Management team to keep projects on track. This platform allows our teams to generate on-the-spot reports on all our construction projects, providing project overviews, deal parameters, status and qualitative commentary, builder performance scorecards and site photos.”

These technological tools may help finance providers and developers respond more nimbly to the divergent trends across different housing segments.

SFG is shortly rolling out SFGconnect 2. Buchanan calls it “the standout system of the industry that tech-savvy, future-proofed and volume brokerages choose as their preferred system”.

While technology offers some solutions, the core challenges facing construction finance – including the uneven recovery between houses and apartments, elevated insolvency rates and the difficult policy environment – will require broader structural responses to fully address.

Policy challenges persist

Despite some positive indicators, industry participants continue to point to government policy as a fundamental obstacle to construction sector health.

“The reality is that this sector is a mess – burdened by inflated costs, high taxes, lack of skilled workers and red tape that the government appears to have no answers for,” says Buchanan.

New financial disclosures relating to climate impacts need to be made by large Australian companies from 1 January 2025. Large and medium-sized construction companies will be affected in a rolling scheme that will be in full force by 2028.
The policy environment remains particularly challenging for smaller construction businesses and subcontractors who would benefit more from a recovery in house approvals rather than just multi-unit developments.

“I would say that whilst geopolitics is playing a part, it’s our domestic governance that is the issue. The policies of our government have not been able to address the now longer-term shortfalls of housing requirements and promises,” says Buchanan.

Lucas addresses the importance of supply chain resilience and how Assetline Capital compensates for its unpredictability. “To ensure that the projects we support reach completion in these uncertain times, we will generally build in a 10–15% contingency into the available funding line to allow for any variations in price,” he says. “The ability to cover variations as they arise is increasingly important as our greatest risk as a lender is the developer’s ability to reach the finish line.” 

Longer term, the underlying market suggests that there will be some growth going forward, but it will be hard won. A Research and Markets report predicts that the construction industry will record an average annual growth rate of 2.9% from 2025 to 2028, supported by investments in the development of the housing, transport, renewable energy and manufacturing sectors. This compares to growth of 9.1% in 2023.

The road ahead for Australia’s construction lending sector is neither smooth nor straightforward. As the industry navigates a labyrinth of economic uncertainties, policy challenges and technological transformations, one thing remains clear: the winners will be those who can adapt, innovate and remain resilient in the face of persistent headwinds.

Published by MPA on 14 April 2025.