Planning a compact future: Should we bank on it?
The limited availability of smaller apartments in Australia is often explained by restrictive design standards and low buyer demand. But this might not be the whole story. Could mortgage lending practices also be shaping what gets built and bought?
Studios and small one-bedroom apartments make up a tiny share of Australia’s housing market. Urbis Apartment Essentials data shows that only 3 in every 1,000 off-the-plan apartments sold nationally from 2015 to 2025 were under 40 m². This means from a sample of 63,193 off-the-plan apartments sold in Australia in this period, just 245 were under 40 m².
We know that planning requirements, development economics and buyer preferences all help explain this scarcity. Yet one potential factor receives less attention: the role of mortgage finance. Mainstream mortgage lending criteria typically exclude compact apartments, as most lenders apply hard minimum size thresholds of around 40 to 50 m². If buyers cannot readily obtain loans for smaller apartments, it may affect not only who can purchase them, but whether these homes are built at all.
Why so few small apartments get built
Design standards clearly influence the viability of compact dwellings, particularly minimum space standards in Victoria and apartment size requirements in New South Wales. Smaller apartments can also carry similar fixed costs to larger apartments, meaning higher costs per square metre and therefore reduced feasibility.
But for mortgage-dependent buyers, lending practices could be a key demand constraint. Lenders commonly treat smaller apartments as higher risk because of concerns about resale liquidity and the potentially narrower buyer pool available if a borrower defaults. These are legitimate commercial considerations. However, minimum size thresholds can also exclude a large share of prospective buyers without assessing the particular dwelling, its location or its market.
Lending practices may also have a self-reinforcing effect. If fewer buyers can obtain mortgages for compact apartments, the pool of potential purchasers remains small and resale activity stays limited. That restricted market may then reinforce the perception that these properties are inherently less liquid.
If buyers can’t get mortgages, developers struggle to get finance. Developers typically rely on pre-sales to secure construction finance, meaning lending restrictions can influence not only who can buy smaller apartments, but whether they are built at all. If a 30 m² unit won’t be financed by a retail bank, it does not count toward funding the project.
This creates a challenge in understanding demand for compact apartments. If these dwellings are rarely built and many buyers cannot readily finance them, market activity alone may not tell us how much demand actually exists.
Do Australians actually want smaller properties?
Limited compact apartment sales make demand difficult to observe, and there are no published demand estimates for small apartments. But evidence from adjacent markets provide some useful signals of demand when compact dwellings are easier to access.
The build-to-rent market offers one useful point of comparison. Urbis data shows 7% of recently built build-to-rent apartments in Melbourne were studios – more than 35 times the 0.2% share of studios in the build-to-sell market. We’ve also identified 10 large-scale build-to-rent developments nationally where studios made up almost 30% of all dwellings. Build-to-rent projects do not depend on individual purchaser mortgages in the same way as build-to-sell developments, suggesting that compact apartments can play a larger role where purchaser lending constraints are removed.
We've also heard anecdotal examples of Melbourne developers successfully selling studio apartments to cash buyers who are not reliant on conventional mortgage finance. While cash buyers likely represent a relatively niche market, the experience also signals a demand for compact apartments when financing constraints are not in play.
The experience of European cities also suggests that smaller apartments can form a larger part of the housing mix in urban markets. In London, one in five new homes built between 2011 and 2019 were under 50 m². In Amsterdam, two in five new homes built in 2016 were studio apartments.
These cities differ in meaningful ways from Australia’s urban centres. But their experience suggests unmet demand could exist here as well, particularly within inner-city locations where smaller apartments make the most sense. Not everyone will seek compact living if given the choice. But housing affordability is improved when people can choose from a broader range of dwelling types, rather than being limited to larger and more expensive homes than they need.
Who carries the cost of limited choice?
When smaller apartments form only a limited part of the housing market, the impacts can be far-reaching. Single people, essential workers, new arrivals and downsizers may find themselves competing for larger dwellings than they need, reducing housing choice and placing additional pressure on the broader apartment market. At the same time, many small, narrow, heritage-constrained or irregular infill inner-city sites might become commercially unviable as larger apartments cannot be accommodated efficiently.
The consequences a system that delivers fewer homes on more land at higher prices with higher carbon footprints, even in the places where density should be easiest to achieve.
What could unlock a compact future?
Small apartments are not the norm in Australia. Yet evidence from build-to-rent developments and international cities suggests that compact, well-located homes can form a meaningful part of a diverse housing market.
Planning reform remains an important pathway to improving housing affordability. But planning changes alone could have a limited effect if prospective buyers cannot finance the homes that those reforms make possible.
Lenders should not disregard legitimate concerns about risk. The question is whether blunt minimum size thresholds remain the most appropriate way to assess risk, and whether those settings are producing unintended consequences for housing choice and supply.
Several options warrant consideration:
Lenders could take a more nuanced approach to assessing value and marketability. Minimum size thresholds provide a simple proxy for risk, but don’t account for other factors affecting liquidity like a dwelling’s location, design quality, price point, rental performance or access to transport and services. A broader evidence-based risk assessment could determine whether individual compact apartments are viable security, rather than excluding them primarily because of size.
The evidence underpinning current lending thresholds could be reviewed. Better data on resale performance, selling periods, valuations, loan defaults and losses would help distinguish risks intrinsic to compact apartments from market limitations partly created by restricted mortgage availability. Evidence from established apartments and relevant build-to-rent developments may help inform that assessment.
Federal and state governments could explore targeted lending initiatives for smaller urban apartments. The Housing Australia Future Fund (HAFF) allows inner-city projects to include studio apartments, indicating a policy role for compact dwellings within social and affordable rental housing. Targeted pilot programs could test whether limited government-backed lending support expands access to smaller dwellings in well-located areas.
State governments can continue reviewing the broader planning and transport settings affecting compact housing. Reforming lending practices will achieve little if planning frameworks impose disproportionate costs or prevent workable compact designs. Flexible design approaches, proportionate apartment standards and appropriate parking requirements could help make smaller homes viable in well-located areas.
If Australians are to have more housing choice, the policy conversation should consider not only what planning systems allow to be built, but also what lending systems enable people to buy.
