Several observations warrant emphasis.  Net overseas migration across all four markets is running materially above pre-COVID, decade-average levels, most acutely in Sydney (+91,573 versus +73,598 p.a.) and Melbourne (+87,768 versus +62,258 p.a.), sustaining structural demand pressures. And yet, dwelling approvals and completions in the current period fall short of prior-cycle benchmarks in every jurisdiction. The supply response, constrained by construction cost escalation, insolvency risk across the development sector, and elongated approval timelines, has not kept pace. Queensland presents a particularly pronounced divergence: economic growth at 2.2%, household spending at 6.9%, and unit price growth at 13.1%, well above the pre-COVID decade average of just 0.3% p.a. This repricing has occurred without a commensurate improvement in supply, compressing affordability rapidly. The ACT, by contrast, exhibits more moderate dynamics. Stable migration, contained completions, and price growth that has recently turned negative are features consistent with a market approaching equilibrium rather than structural strain. Across all four markets, the current environment is characterised by demand (indicated by population growth and household formation) above long-run norms, and supply below them. This combination is supportive of underlying asset values.  It does not preclude near-term cyclical volatility as affordability constraints intensify.

Affordability: A Reframed View

Recent data necessitates a reassessment of relative affordability positioning across capital cities. Brisbane, previously characterised as a lower-cost alternative to southern markets, is now firmly established as Australia’s second most expensive capital by median dwelling value. At approximately $1.08 million, it sits materially above Melbourne at approximately $826,000. 

Serviceability metrics reinforce this shift. Brisbane now ranks among the least affordable capitals on an income basis, with mortgage servicing ratios typically exceeding 50% for new entrants. The demand narrative remains strong; however, the affordability buffer that previously underpinned it has been eroded.

This adjustment is important. Markets can simultaneously exhibit strong structural demand and elevated affordability risk. Treating these as mutually exclusive is a category error.

Rate Elevation: Yield Expansion and Risk Accumulation

The relationship between rising rates and private credit returns is inherently two-sided.

On one hand, higher base rates enhance income through mechanical repricing, while bank retrenchment continues to expand the non-bank lending opportunity set. Pricing power and covenant quality have improved across new originations.

On the other hand, borrower stress is rising. Incremental rate increases continue to expand the cohort of households at risk, while transaction volumes are moderating as affordability constraints intensify. Development timelines are extending, and cost pressures—particularly in Queensland—are creating latent feasibility risks on projects underwritten in prior periods. 

Importantly, these dynamics are not symmetrical in timing. Yield benefits are immediate; credit risks emerge with a lag. Portfolios may therefore appear robust in the near term, while underlying exit assumptions are progressively tested.

This lag effect is central. The relevant question is not the level of yield generated today, but the durability of capital outcomes under forward affordability constraints.

The Affordability–Volatility Relationship

Structural undersupply provides support to valuations, but it does not eliminate cyclical volatility.

Markets that have experienced the strongest price growth are, by definition, most exposed to affordability compression. As borrowing capacity tightens, the marginal buyer pool contracts—reducing transaction velocity and increasing settlement risk.

Strong fundamentals and affordability stress can—and currently do—coexist. Understanding that interaction is critical to credit selection, particularly where exit assumptions depend on depth of demand rather than absolute scarcity.

State Perspectives

The interaction between population growth, supply constraints, and affordability pressures is producing increasingly differentiated outcomes across the major East Coast jurisdictions of Australia where Harbour Credit Partners focuses its lending activity at present. The opportunity set remains, but the drivers of risk are no longer uniform.

Queensland — Compelling, but less forgiving
Queensland continues to exhibit the strongest demand dynamics nationally, supported by interstate migration and infrastructure investment. The supply position remains deeply constrained. However, rapid price appreciation (~9–12% p.a.  through 2020 – 2024) has materially eroded affordability, with Brisbane now among the least affordable capitals on a serviceability basis. Construction costs are rising fastest in this market, and feasibility assumptions set in earlier periods are increasingly exposed. The structural case remains intact; execution on new developments now requires greater care.

New South Wales — Depth over momentum
New South Wales remains characterised by severe undersupply, with completions well below household formation. This creates a strong foundation of support for property values. However, affordability is stretched, and further rate increases continue to compress the active buyer pool. Transaction velocity (ie. the time and cost to sell a property), rather than nominal valuation, is the critical variable. A well-located asset in a genuine undersupply pocket remains fundamentally different to a marginal or specialised property reliant on thin buyer pools.

Victoria — Improving, with constraints
Victoria is in a recovery phase. Population growth has re-accelerated following the post-COVID period, reaching 2.7% in 2024 and 1.8% in 2025. This has coincided with flat to negative price growth, resulting in a relative improvement in affordability compared to other capital cities.

The forward supply pipeline is tightening after a sustained period of reduced approvals, providing a more constructive medium-term backdrop. Vacancies remain low across many (but not all) metropolitan areas, implying a favourable demand dynamic relative to supply for housing. However, the land tax regime continues to shape investor behaviour and weighs on exit liquidity across certain asset types.

Our assessment is that while conventional cyclical risks may be more muted than in less affordable markets, valuation stability remains contingent on continued population inflows and a constrained supply response.

ACT — Stable, with segmentation
The ACT presents a more stable profile, supported by a high-quality, public sector-dominated income base. Affordability risk remains moderate. Market conditions are bifurcated, with a tight detached housing segment alongside pockets of apartment oversupply. The investment case is less about growth and more about income resilience and predictability.

HCP View

It should be noted that the above analysis does not contemplate a significant macroeconomic event resulting in recession. While interest rates are expected to rise further over the next twelve months and household indebtedness remains elevated by global standards, the possibility of a macro shock disturbing these trends cannot be dismissed. This is not our base case. However, as John Maynard Keynes is widely credited as saying, “When the facts change, I change my mind. What do you do, sir?”

We remain active, but deliberately selective. The disconnect between household income and housing prices has scarcely been as vast as at present and is exacerbated by a rising rate environment. 

The structural supply imbalance persists, and the current rate environment supports attractive income generation on our loans. At the same time, affordability constraints are now a defining feature of the market and introduce risks that are not captured by backward-looking performance.

This is not a cycle that rewards passive exposure. It rewards precision: in valuations, in market selection, in structure, and in borrower assessment.

The opportunity set remains compelling. The discipline required to capture it has increased.