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Key factors behind the housing supply crisis

We all know that Australia is in the grips of a severe housing undersupply, with demand far outstripping the number of new homes being built.

Nationally, new dwelling approvals and completions have fallen sharply in recent years, despite a return to post-pandemic levels of population growth.

The result?

Higher prices, rising rents, and increased affordability challenges.

Government targets suggest Australia needs at least 240,000 new homes per year to meet demand. However, current build rates are falling well short, with recent annual completions hovering around 170,000 to 180,000.

My chart shows that last year Australia approved just 6 new homes per 1,000 residents. This level of supply was 10 per 1,000 residents a decade ago. That’s a 40% decline!

When it comes to the capitals only Canberra and Melbourne are batting higher up the list, whilst Adelaide, Brisbane and Sydney are in the middle order and way off the pace are Hobart, Perth and especially Darwin.

Many want to blame this widening mismatch between new housing supply and demand on high immigration. This is only part of the issue. My chart shows that even in areas with middling population growth these laggards are struggling with new housing supply.

So what’s going on?

Several factors are stalling new housing supply.

Construction costs have soared, up 30 to 40% in some areas post-pandemic, making many projects financially unviable. Whilst built cost growth has slowed down, they are still rising and rarely fall. We are stuck with high build costs for a long time.

A shortage of skilled labour is said to be further delaying builds, while interest rate hikes have made it tougher for developers to secure financing. Yet I am not that convinced about labour shortages and that is a topic for a future Matusik Missive.

And last but least, planning and zoning restrictions in major cities and regions are also limiting supply, with approvals taking years to process. This for mine is the killer.

And housing undersupply is most evident in the rental market.

Vacancy rates in major cities are at record lows, often below 1%, pushing rents higher. Meanwhile, the cost of buying remains out of reach for many first-home buyers.

Addressing the issue requires faster approvals, better infrastructure planning, increased private sector investment, and support for alternative housing models like modular forms of construction and backyard homes.

Built-to-rent has a role but needs to spread beyond apartments and into the townhouse and small-lot home space. Most built-to-rent housing in American, for example, are detached homes, then townhouses followed by, a distant third, apartments.

And when looking at the world stage, Australia is batting below many other countries when it comes to new housing supply. Those countries with limited new housing supply are facing (or have seen) a change in national government.

Source: OECD, Matusik Missive

Amazingly parts of Europe can build more new homes per head of population than we can. If Italy, France, Germany and Spain can build at rates some 25% higher Australia, surely we can do better.

But maybe we won’t. The same ‘head in the sand’ attitude applies to our energy needs down under.

Yet without action, affordability pressures will continue to mount, locking more Australians out of home ownership.

A word of warning. Millennials, Gen Z and some of the younger Gen X set will get even when their time comes. Watch these generations tax super funds in the future and other older generational financial windfalls when it comes to their time to rule.

Paying down the national debt will only be part of their reasoning. Getting even - i.e. being locked out of the housing market - will be a main reason for this revenge.

 

Michael Matusik is an Australian housing market specialist, providing commissioned housing and demographic market reviews, updates and outlooks for over 30 years, and shares his thoughts in his blog, Matusik Missive.

 

17 Comments
David G
May 06, 2025

Visit any building site and you will find practices thousands of years old? Cheap readily available material BUT, VERY labour intensive!
It's now possible to build houses with 3D printers, China can build a house in 7 days. Yes, they have got a massive oversupply at the moment, but guess what we have a massive undersupply?
Too much vested interest here in the status Quo! Albo wants to get stuck in and make us all happy again, he knows what he needs to do!!

John Wilson
May 05, 2025

What has not been mentioned is excessive expectations of the size, quality and location of houses by young people: I suggest that too often they have grown up in their parents' big home, renovated over years, and expect to get the same. Lower your expectations young people! Accept something less grandiose?

Dudley
May 05, 2025

"expectations of the size, quality and location of houses by young people": "err, houses"?

When I were a lad I had tarpaulin and blanket for bed, firelight for TV and thousand stars for roof.
Morning chorus for waking and thousand flies for company.

Try and tell that to the young people of today, will they believe you? No.

Graham
May 03, 2025

We live in a capitallist society, so we should expect many persons to gain wealth through property investment. The main problem for the young ones now is the change in attitude and financial borrowing. The purchase of a property is a life style and life LONG investment. we borrowed money to purchase a block of land and also money at 6.25% for 25 years. We built a house and had sheets for curtains and sat on wooden boxes!. we finished with a property that we eventually owned and sold for $600,000. The original cost was $12000 and we were lauging when interest rates went to 17%. The youth of today should be allowed to borrow at FIXED interes rates and LONG TERM. If they do not pay all the mortgage off they will still have made a great profit through the increased price of the property. They should not expect to pay their house off in 5 or 10 years and it is stupid to expect the system to lend them money at rediculous rates like 1%. If you gave each of these young ones $10,000 they would NOT lend it for rates less than 5%. Owning a house is a LIFE LONG project and is GOOD debt. the young ones also have high living expectation costs in travel, holidays, and eating out. I did not fly out of Australia until I was 50.

John
May 04, 2025

It's hilarious that so many young ones voted (directly or via preferences) for Labor, the party of mass unconstrained immigration, that will make home ownership more expensive and less attainable due to increased demand. They have made their bed and can lie in it. They just won't own anywhere to put the bed.

Denise
May 05, 2025

John I was going to write the same thing. The lack of political and economic savvy in these generations is disturbing and therefore they are unable to critically examine election promises . They just vote what looks good on the surface. As you say, they will now learn the hard way. A pity . I just wonder how these generations can be upskilled in economics. The young ones that I work with will not go to an outer suburb for a humble start. They want it all and they want it now and for no effort on their part.

Janet
May 12, 2025

Brilliant comment. The author claims that immigration doesn't make a big difference to housing shortage by saying that the situation is the same as those places where immigrants are moving into. But that is disingenuous (or else he has not does done his research). People who want to get into the housing market and can't afford to in their city are buying houses and apartments in cheaper cities which has the same effect as immigrants moving there. Since Labor took power 3 years ago 3 million permanent visas have been issued. (not counting student visas and they have to live somewhere) And that doesn't affect housing demand and cost ???? Give me a break!

Tom
May 02, 2025

Great article and comments. I think we underestimate the inflationary impact of
1. Trade Unions, especially in Qld and Vic.
2. Regulation and its cost/time burden, eg the RAB Act in NSW and massive soft costs on development.
3. Immigration of wealthy non-workers when we should welcome skilled labour, e.g., the Snowy Hydro scheme.

GeorgeB
May 07, 2025

Totally agree about the impact of union demands on declining productivity in this country (little wonder that apartment construction cost are heading toward an unaffordable $20k per square meter). This is likely to be a millstone around the neck of meeting supply targets for years to come.

Dean
May 01, 2025

Australia does not have an undersupply problem. It has an excessive demand problem, driven by financial concessions and incentives.

Uncapped CGT exemption on principal residence, uncapped age pension means test exemption on principal residence, negative gearing, 50% CGT discount on investment property, and every single "first home buyer" scheme all drive up demand and prices unnecessarily. Australia has hundreds of thousands of dwellings that are unused most of the year, and millions of unused bedrooms in properties much larger than needed for their occupants. On aggregate, Australia has a massive oversupply of housing needed for shelter and comfort.

Increasing housing supply might reduce some of the symptoms, in a similar way to aspirin reducing symptoms of a hangover. But just as lack of aspirin is not the cause of hangovers, lack of supply is not the underlying cause of Australia's housing crisis. The only sustainable and equitable solution is to scale back financial concessions and incentives that encourage overspending on housing.

Hugh A
May 01, 2025

Dean - I agree with you - it's supply and demand as always and, in the case of Australian houses, demand has been so overstimulated by the government policies you list (and I'd add foreign buyers) that prices have soared, but it's politically more convenient to blame an imagined supply shortage than the reality of politically boosted demand, which has reached the point that housing is by far the favoured destination for most Australians' savings, in fact almost the only one.

Geoff
May 01, 2025

Also: https://www.abc.net.au/news/2024-07-13/report-reveals-100000-melbourne-homes-vacant-in-2023/104080858

Ronald Di Pietro
May 01, 2025

Micheal - I am a retired Architect and I shudder at what’s happened to our state Victoria let alone the country. Cost of construction is so high that when you add land it becomes unviable to build for investment and rent out. Buying already built is expensive in the inner suburbs-not feasible to rent and get a 1-2% return. Developers and investors are slugged with land tax, council planning delays and it is simply not at all attractive to invest. So it’s much more lucrative to invest your cash in management funds supplying 6-10% p.a. So why invest in a house and taxes for 1-2% ??
Solution is Government have to relieve all detrimental issues to investors and developers-such tax breaks, no tax, even subsidise construction otherwise there is no hope to incentivise building more homes -other than 50 kilometres out of main cities which a majority of people don’t want to buy?? Businesses are going under due to current policies? There is little respite on the horizon?? Taxing the better off people will not work!! We need massive reform and no government has the fortitude to make such decisions!! A revolution perhaps !! But all Australian are just too comfortable for that !

michael
May 02, 2025

The people who can't afford a home are up for it. They just haven't got their act together. Yet.

Scott William Whiston
May 01, 2025

Thanks Michael good read, can you please explain why no one will talk about the key driver of this housing issue, which must be immigration? Please ....

John
May 01, 2025

Hi Scott, a recent article dealt with migration directly, you are correct that it is the key cause of Australia's housing being unaffordable. https://www.narrowroadcapital.com/memos/does-anyone-really-care-about-housing-affordability/

Dudley
May 02, 2025

'Australians have among the highest level of household debt in the world, as well as several of the most expensive average city home prices relative to incomes. Low income Australians are estimated to be spending more than half of their income on rent. New home buyers are estimated to be spending around half of their income on mortgage payments with insurance, rates and repairs to be added on top of that. Australia is a world leader in unaffordable housing.'

Let them save up.

Swingeing interest rates to Make Saving Great Again and put the skids under home prices.
Not tax in inflationary gains.
Backyard tiny houses to aid the "Bunk of Dad&Mum"; no tax on employer supplied accommodation.

Stop feeding the young into the rent-mortgage grinder; buy 'Cash on knocker'.

 

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