When lenders lower the ceiling: what shrinking LVRs are telling us about construction

On paper, construction is having a better year. The industry recorded 3,472 first-time insolvencies in 2025–26, down 4.7% on the year before. Yet it still accounts for one in four company failures in Australia, while making up around 17% of businesses.

I'd be cautious about reading that as recovery. In my experience, insolvency statistics are the last place distress shows up. The first place is the lender's credit committee. And right now, private lenders in construction are sending a clear signal.

What's changed since the Budget

Since the May Budget, private lenders funding development and construction have been actively reducing the loan-to-value ratio (LVR) they're prepared to offer on sites.

LVR is simply how much a lender will advance against what a site is worth. Take a site valued at $5 million. At a 65% LVR, the developer can borrow $3.25 million. Cut that to 55% and the same site supports $2.75 million.

Nothing about the site has changed. But the developer now has a $500,000 hole to fill with equity – or the project doesn't start, or doesn't finish.

Multiply that across a portfolio of sites and you start to see the problem. Developers and builders can no longer borrow at the capacity they could six months ago. That flows straight into cash flow, and into the decision to commence or complete construction.

What lower LVRs are really telling us

An LVR is the lender's honest view of the risk in a site. When it falls, the lender either thinks the site will be worth less at completion, or is less sure what it will be worth at all.

The drivers aren't hard to find. The Budget's negative gearing and capital gains changes, starting 1 July 2027, are designed to favour new builds over time. But lenders price what they can see today: a transition period, three cash rate rises this year, and construction costs they rank as the market's biggest challenge in 2026.

Less confidence in the site means less money against it, and less money means less building. Our view is that construction slows further over the coming months – and that the headline insolvency numbers catch up with what lenders are already telling us.

How the squeeze travels

We've seen this pattern before, and it moves in a predictable order.

1. The developer can't draw the funds the feasibility was built on.
2. Progress payments to the builder slow or stop.
3. The builder leans on suppliers and subcontractors, and on the ATO – super, PAYG and GST quietly become working capital.
4. A project stalls, and with it a chain of businesses that never borrowed a cent from the lender in the first place.

What this looks like on the ground

One of our current clients is a specialist subcontractor who has spent years delivering work for builders and developers. On paper, the business is doing what it should. It made a profit last financial year.

But it's also carrying more than $2.7 million in debt – including around $350,000 in tax and superannuation – against assets of roughly half that. Builders and developers owe it around $600,000. It owes its own suppliers more than twice that.

The director did what most people in that position would do. He went to the banks for a loan, secured against the business's assets, to clear the tax debt. He was turned down.

Without that facility, the path left is a formal restructure. A business that can still make money now has to restructure to survive – not because the work dried up, but because the cash didn't arrive in time.

That's the part of a funding squeeze the statistics don't show. The lender pulls back from the developer. The developer slows payments to the builder. The builder slows payments to the subcontractor. And the subcontractor ends up asking a bank for money he's already owed.

There's an early sign it's already happening. Receiver and controller appointments in construction rose from 252 to 299 over the past year. Receiverships are a lender's tool. When they rise while headline insolvencies fall, distress is being handled by secured creditors first – and the rest of the chain usually follows.

What we're advising directors to do now

• Re-run your feasibility at a lower LVR. If it only works at last year's leverage, find out before your lender tells you.
• Talk to your lender early. Before a covenant breach, it's a negotiation. After, it's enforcement.
• Protect your tax position. The ATO is the easiest creditor to defer, and the one most likely to make directors personally liable.
• Get advice while you have options. Small Business Restructuring and Voluntary Administration work best when they're chosen, not forced.

More in the AVA Resilience Radar

This is one of the pressure points we're tracking in the 2026 AVA Resilience Radar, our annual national read on the health of Australian SMEs, drawn from more than 1,000 business owners.

We've already shared one early finding: one in five Australian SMEs has less than two months of cash on hand. In a sector where a single funding shortfall can halt a project, that number matters more than most.

The full report lands in November, with deeper findings on cash runway, the industries under most pressure, and how prepared business owners really are when credit tightens.

Talk to us before the valuation does

If a lender conversation or a revaluation has changed your numbers, speak with Anthony Percy, our Head of Strategy & Growth. A confidential 30-minute consultation can help you see your options clearly while they're still yours to choose.

Book a time with Anthony →