The “missing middle” of low-rise, medium-density homes could play a key role in overcoming Australia’s housing affordability crisis by increasing the volume of dwellings in established areas.
While small-scale developers are ideally suited to missing middle housing, they still encounter challenges accessing traditional lender services.
These challenges could create major opportunities for both retail and wholesale investors, by helping solve the financing pain points of smaller developers.
Australia’s housing crisis continues to worsen
Public attention has focused heavily on the woes of the Australian housing market - in particular a worsening affordability crisis created by a shortage of well-situated homes in major cities.
The crisis is set to worsen in the future. New housing starts plunged by a staggering 23 per cent in 2022 on the back of soaring costs and construction delays, according to data from the Housing Institute of Australia (HIA)
These problems have continued in 2023, with the housing starts of Australia’s 100 biggest builders dropping to 57,830 in the year to June, for their lowest level since 2013.
The severity of the problem has since prompted a strong response from government. In August, national cabinet unveiled an ambitious plan to build 1.2 million new “well-located” homes over the five-year period starting from 1 July 2024.
Given that national cabinet made specific reference to “well-located” housing, the plan is expected to drive the creation of in-fill housing situated in established urban areas.
The Victorian government’s new housing plan, for example, highlights a focus on in-fill housing, which can create new homes situated near existing amenities and infrastructure, and thus reduce the need for urban sprawl.
The plan states that ‘By unlocking new spaces to build homes across established suburbs, we’ll stop urban sprawl and boost housing supply in the places Victorians want to be – close to where they work, or send their kids to school’.
Missing middle could be the key to in-fill housing supply
The “missing middle” refers to those homes that lie between detached suburban houses and high-rise apartments. These homes primarily consist of low-rise, medium-density dwellings, such as duplexes, terrace houses, town homes, and Fonzie flats.
As a category of housing, the missing middle is extremely well-suited to in-fill development in Australia’s established suburbs. It’s comparatively easy for a developer to take an existing home or empty lot, and convert it into a low-rise dwelling that fits in with the suburb.
The low-rise, medium-density character of missing middle homes also makes them less likely to disrupt the surrounding built environment. They can increase the supply of dwellings in an area, without compromising its character.
Small-scale developers better suited to low-medium density infill development
Small-scale developers are especially well suited to the creation of in-fill developments and missing middle homes, given their flexibility as more nimble and adaptable businesses.
Larger residential developers are more focused on large-scale developments such as high-rise apartments or new housing estates — projects which are just as necessary to meet housing development targets — where the economies of scale are readily apparent. It makes far less economic sense for them to pursue piecemeal in-fill developments that are scattered in location and smaller in scope.
By contrast, the economic rationale for smaller developers to pursue individual in-fill developments is much stronger, as it’s easier for them to achieve a satisfactory return from a more modest capital base.
Smaller developers are also more agile and nimble than their larger counterparts, making them better suited to the variable conditions surrounding missing middle developments in established urban areas.
Lisa Digby, head of operations, CrowdProperty, said this means smaller developers are well-positioned to capitalise on the smaller in-fill opportunities that large-scale developers overlook.
“In-fill or brownfield development will be critical to delivering a lot of well-located housing, especially in areas that aren’t suitable for high rise projects but more suited to medium-density dwellings,” Digby said.
“The high-volume players aren’t going to look at the smaller in-fill sites, because it’s not worth their while with the overheads and cost base they need to cover.”
Financing still a challenge for smaller developers
While smaller developers could be poised to play a critical role in the creation of missing middle developments, in the Australian market, they continue to remain hampered by inadequate financial services.
CrowdProperty’s recent survey of small-scale developers found that they still struggle to obtain funding from traditional financial providers.
Survey respondents said they wasted too much time trying to secure funds for their projects from unresponsive lenders, and collectively gave traditional financial providers a negative Net Promoter Score (NPS).
When asked about the biggest barrier to the building of more homes, Australia’s small-scale developers pointed to debt financing as the biggest hurdle they face, particularly given the costs of project development.
Opportunities for investors in funding small-scale development
The need for more missing middle homes from small-scale developers could create excellent opportunities for Australian property investors. This is especially the case given the financing challenges that continue to constrain these developers.
Specialised marketplace lenders like CrowdProperty provide investors with a convenient means of capitalising on these opportunities. Its online platform matches promising real estate projects with funding sourced from a broad range of investors, including both wholesale and retail (everyday) investors.
In addition to solving the pain points of developers, CrowdProperty also gives investors the ability to better tap promising opportunities in the real estate sector that have been fully vetted and scrutinised by a team of industry veterans.
This includes opportunities to fund those smaller in-fill and missing-middle developments that are on track to play a more prominent role in the future for the housing sector.