Home lending risks in strata
The blind spot in the residential market that could hit bank balance sheets.
Residential property is a core element of the Australian financial system. It is treated as a safe, liquid collateral class. Australia’s banks are carrying a growing, under-priced exposure in residential lending: strata.
The strata sector already represents $1.4 trillion in insured building value and covers 3.2 million lots across 368,000 schemes. With the federal government’s target of 1.2 million new homes in five years, most of them apartments and townhouses, the sector is set to expand by 30%. Yet our credit models treat strata apartments much like detached houses, ignoring structural differences that materially increase borrower and lender risk.
Why strata is different, and the inherent risks…
Collective liability: Every apartment owner is jointly responsible for defects, maintenance and insurance for the scheme. When things go wrong, costs can be covered by special levies, sometimes exceeding six figures per lot. This can be a direct trigger for arrears and defaults.
Defect burden: Independent estimates put outstanding apartment building defects at $10.5 billion. Remediation costs are usually borne collectively, and liability falls outside traditional credit risk models. Building bonds and defect insurance markets are emerging in some jurisdictions to cover new builds however the retrospective liability remains.
Underfunded reserves: Many schemes lack adequate capital works (sinking) funds despite a legal requirement to plan for ten years of major maintenance. Lending against these assets is not the same as lending on a single title home.
Weak governance: Owners’ corporations are run by volunteers, often inexperienced, and supported by a strata management industry in turmoil. High churn, poor transparency, and reputational scandals further erode stability.
Valuation blind spots: Current practices rarely account for levy adequacy, insurance exclusions, or governance failures. A headline market price and/or low strata levies can mask significant downside risk.
No national standard: With fragmented regulation and inconsistent disclosure, lenders lack a reliable view of scheme-level financial health.
Regulatory risk as governments grapple with protecting the population from financial ruin.
Investment performance in apartments does not match investment performance in freestanding housing. Over the past decade, house price growth is significantly higher than apartments in many regions across Australia.
Banks cannot afford to write mortgages for residential strata blind. An increasing portion of strata in the housing mix is growing systemic vulnerabilities. With an urgency on development of medium and high density living these risks will scale on bank balance sheets.
Understanding the asset class, creating tools to assess inherent and specific risks and establishing metrics for benchmarking, performance improvement and asset protection will be required to mitigate risk and influence this exposure.