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Right when the nation needs to be incentivising new residential builds, challenges in obtaining finance are pushing prospective home owners back into the market for existing dwellings.
Mortgage broker Jaimin Yadav, director at Finedge Finance, has weighed in on the obstacles preventing buyers from financing end-to-end property builds, stating that these challenges are contributing to a decline in housing developments which is hindering progress towards the national housing target of 1.2 million homes by 2029.
The director stated that rising land prices and escalating building costs are forcing consumers to borrow greater amounts of money for housing projects, while their borrowing capacities have not kept pace with these increases.
“The average person’s borrowing capacity has fallen over the past couple of years due to a combination of significantly higher interest rates and cost of living,” he explained.
While Yadav acknowledged that borrowing capacities have slightly improved over the past few months due to the effects of stage three tax cuts and the relaxation of some lenders’ credit criteria, he noted these increases have critically not been sufficient to cover the increases in land prices and construction costs.
“I’m seeing more and more borrowers who are struggling to get the finance they need to complete an entire home building project – from purchasing the land to constructing the home – and I’ve heard similar stories from other mortgage brokers,” Yadav said.
The director noted that borrowers unable to secure bank loans for fund land purchases and home building projects are increasingly turning to non-bank and private lenders.
Across these alternative financing sources, Yadav highlighted that “there aren’t many lenders that are willing to finance end-to-end property builds; and those that are willing are often demanding deposits of as much as 20 per cent to 30 per cent for the whole project or up to 50 per cent for land only”.
Due to these challenges, the director said that an increasing number of prospective buyers who initially aimed to buy land and build their own homes are now opting to buy either newly constructed homes or existing properties instead.
Yadav also highlighted that purchasing an established property is also viewed more favourably by financial institutions, noting that “there are more second-tier and third-tier lenders willing to finance that kind of purchase; and they’re often willing to accept just a 20 per cent deposit”.
“Some consumers are deciding that if they can’t build their dream home from scratch, they’d rather buy an established property because it’s simpler, faster and, from a lending perspective, cheaper, and not running too much risks on valuations.”
The director stressed that these changing buyer habits are critically “reducing demand for new builds, at the very time the federal government is trying to increase housing construction”.
Yadav further emphasised that to re-incentivise home building among consumers, the situation would only improve with a “significant increase in borrowing capacities”.
“It’s possible conditions will be different in 2025, if interest rates, property prices and inflation all decline, as that will increase the average person’s borrowing capacity.”
“In that case, we expect it’s likely that more people would be able to fund new builds through mainstream banks, which would steer some people from the established to the new property market and give the home building sector a bit of a boost,” he concluded.
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