Australia’s housing market has been dominating headlines for all the wrong reasons. After two decades of uninterrupted growth, the market is undergoing a correction driven by rising interest rates, sustained cost of living pressures, and more recently, the Federal Government’s proposed changes to capital gains tax and negative gearing.
While some cooling of the market is probably welcome, especially by first home buyers, the negative news headlines are overshadowing many of the tailwinds that continue to support Australia’s housing market over the longer term.
The more important question for investors is whether current conditions reflect a structural problem or another stage of the property and credit cycle Market corrections can create challenges, but investment outcomes are ultimately driven by fundamentals, which remain firmly in place:
Consider the fundamentals:
- Australia remains one of the fastest-growing populations in the developed world, with net migration still running at around 300,000 people a year
- demand continues to outstrip new housing delivery, creating a structural tailwind for residential real estate with an estimated national shortfall of 200,000-260,000 dwellings
- the government has set a target of 1.2 million new homes by 2029, delivering industry reforms and favourable policy settings designed to drive housing growth.
Private credit is funding this gap
Closing the housing supply gap takes capital, and increasingly, that capital is coming from real estate private credit. With banks required to operate within increasingly stringent capital and lending parameters, private credit is becoming an important complementary source of funding for housing and property development.
That is also why this moment matters for the sector’s credibility. Recent headlines have no doubt unsettled investors: redemption gates at several funds, the collapse of a major residential developer with a construction pipeline of tens of thousands of dwellings, and public comment from the corporate regulator describing this as private credit’s first real test.
Zagga’s investment philosophy has remained consistent since inception: deploy capital selectively and conservatively, regardless of prevailing market momentum. Rigorous risk management and capital preservation remain central to every decision, with opportunities assessed individually across the loan, sponsor, and underlying asset. Our priority is not origination volume or the pursuit of headline returns, but appropriately structured, risk-adjusted outcomes for investors.
Recent market events have reinforced the importance of understanding how returns are generated. Similar outcomes can often be achieved by taking very different levels of risk. Successful execution comes down to disciplined assessment. It is a simple framework: back the right asset, with the right developer, in the right market, at the right price. It’s an approach that becomes paramount in markets like today.
When saying no is the discipline
Not every attractive-looking deal is the right one and sometimes the loans you decline best demonstrate a manager’s discipline and process in action.
Zagga was recently presented with two comparable opportunities in the same south-west Sydney growth precinct, near the new Western Sydney Airport.
They were both land subdivision projects to deliver curb, gutter, and road infrastructure ahead of residential construction.
The first carried a 60% loan-to-value (LVR) ratio, higher pricing, and on paper, stronger headline economics for both investors and the lender. Zagga declined it, based on its assessment of the sponsor and its conviction in the underlying asset.
The second required a 75% LVR senior facility for a 50-lot subdivision, a higher leverage position that, on the surface, some managers would have judged less attractive. Zagga backed it, on the strength of its conviction in the asset and the developer’s capacity to deliver.
The outcome: the facility Zagga wrote was repaid in full and on time with all 50 lots sold. The facility Zagga declined has since experienced material financial distress and enforcement action.
The outcome demonstrates that risk cannot always be assessed by a single metric. Understanding the sponsor, the project, and the underlying market can often be as important as leverage ratios when assessing risk.
The lesson isn’t that lower leverage is always safer, or that higher pricing always signals better risk-adjusted return. It’s that disciplined underwriting – which requires deep market experience, connections and networks, a skilled assessment and understanding of the project, and the ability to correctly price risks – is critical no matter the market.
Where to from here for private credit
No sector is immune from stress. However, private credit isn’t broken because one highly leveraged developer failed – property development lending, whether from banks or non-banks, always carries construction and settlement risk. In private credit, defaults are a known and manageable part of the risk landscape. Yet, a default does not have to mean a loss. How a manager handles recovery is as telling as how they underwrote the loan in the first place.
When liquidity tightens and competitors pull back, well-capitalised and deeply experienced managers, with a strong pipeline and a long track record of successful execution, will be presented with more quality opportunities. Zagga’s own loan originations are up 86% year-on-year in FY26 – a reflection of both rising demand for private credit and a deliberate, selective approach to where we deploy capital.
The industry’s response to recent stress – including new standards on valuation independence, liquidity stress-testing, and consistent default terminology – is a welcome and overdue step. Managers who are already underwriting and reporting to that standard should see it as a validation of existing practice, not a compliance burden.
For investors and advisers assessing exposure to real estate private credit right now, the focus should not be on the returns being offered but how those returns are being generated. The questions worth asking are straightforward: what loan-to-value ratio does the fund actually run; where does it sit in the capital stack; how independently is the loan book valued; what do the fund’s redemption terms genuinely allow for under stress; and, critically, how has the manager handled a default in the past, not whether it has ever had one, but what happened next.
Australia’s long-term housing story remains intact: a growing population, a shortfall in supply, and a policy environment focused on addressing this structural issue. Real estate private credit is critical to help make these policy goals a reality. The managers who come through this cycle in the best shape will be the ones who treated discipline as a constant, not a response to headlines.
Zagga whitepaper: Opportunity through uncertainty
As market volatility rises and traditional portfolios come under strain… where is capital turning for stability?
Our latest whitepaper explores the global search for yield, the risks and opportunities across private credit, and why Australia continues to attract attention.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
This article was developed in collaboration with Zagga, a Stockhead advertiser at the time of publishing and additionally published in The Daily Telegraph, Toowoomba Chronicle, Cairns Post, Geelong Advertiser, Gold Coast Bulletin, Herald Sun, The Mercury, NT News, Adelaide Advertiser, The Courier Mail, and Townsville Bulletin.
