What the risk weights built
Private credit did not appear in Australian property because it was fashionable. It appeared because a capital rule made complex lending uneconomic for banks. Understanding that is the difference between reading this market and guessing at it.
Every few years someone declares private credit a bubble, usually without reference to the one fact that explains the asset class: a residential mortgage carries a risk weight of about 25 per cent on a bank's balance sheet, and a business or development loan carries 100 per cent.
That is a capital rule, not a market signal. A bank holding four times the capital against a construction facility as against a suburban home loan will, rationally, write the home loan. Multiply that across two decades and you get the credit market as it exists: banks flooded into mortgages, retreated from complex property lending, and lost the people who knew how to assess it. Craft leaves when the work leaves.
Private credit did not out-compete the banks. It filled a vacuum the banks were paid to create.
Where that leaves us in 2026
Four pressures are shaping the year, and they do not point the same way.
Construction costs have not come back down. They stabilised, which is not the same thing. Feasibilities written on 2021 numbers still do not work, and the projects clearing today are the ones where the sponsor re-based the model rather than hoping for relief. We assume a five per cent contingency and a fifteen-month facility on a twelve-month build.
Superannuation and tax settings are moving. Changes to how larger self-managed balances are treated are pushing trustees to look harder at what they hold and what it yields. Secured property credit benefits from that scrutiny — but money arriving because of a tax change is not the same as money that understands the risk.
Rates are the noisy variable. If they rise, the first effect is usually the opposite of the one predicted. Late in a land cycle a rise pulls buyers forward, because people move before credit tightens further. The cracking comes later, through unemployment rather than the rate itself.
Private credit's own concentration is the risk worth naming. Roughly half of Australian private credit is property-backed, much of it development. Single-sponsor exposures have already forced redemption gates and write-downs at more than one fund, and ASIC is looking closely at how marks are struck. Ask a manager which sponsors they are exposed to, at what concentration, and how a valuation is set when nothing has traded.
The prop that holds it up
Australian household spending rests on a belief that house prices only go one way, and that belief is load-bearing. When it wobbled between 2017 and 2019, people stopped drawing on offset accounts to fund consumption and started hoarding cash. Japan is the case study nobody wants to run.
What keeps the belief intact is not one policy but a lattice: capital rules, immigration settings, negative gearing and capital gains treatment, auction culture, periodic stimulus, and a currency defended in part by asset prices. Each props up the others, which is why forecasts of an orderly correction keep being wrong. The system does not correct politely. It waits for unemployment.
The positive case
The vacuum is structural, not cyclical. Risk weights will not be rewritten to make development lending attractive to a major bank, and the credit skills that left have not returned. The opportunity for disciplined non-bank lenders is durable in a way most yield opportunities are not.
A market under scrutiny rewards the careful. When capital was indiscriminate, rigour earned you nothing — you were outbid by whoever wrote the loosest terms. That is no longer true. Write-downs elsewhere have made investors ask better questions, and better questions favour lenders who can answer them: registered first-ranking security, valuations no older than three months, conservative LVRs, a stated exit before a dollar moves, and marks that can be defended line by line.
The same holds on the borrowing side. Complexity is being repriced as capability rather than a problem. A second mortgage across two states, a residual stock facility on completed dwellings, funding committed while a valuation is still being instructed — ordinary transactions that require someone to have done them before.
The outlook is not that the tide lifts everything. It is narrower and healthier than that: deals done on their merits, sponsors underwritten rather than assumed, and the premium accruing to whoever can read an asset properly and say no when the numbers say no. That has always been the business. For a while, the market forgot it was.