Australia’s housing conundrum
It’s a catch-22: Australia needs to build more homes to put downward pressure on dwelling prices. But Australia also needs higher dwelling prices to attract more investment from developers.
Australia’s housing market has a habit of making headlines for the wrong reasons. Last month, The Economist’s ‘Carrie Bradshaw Index’ – a measure of how much someone must earn to comfortably live alone, named after the Sex and the City protagonist – added some colour to our housing affordability challenge.
The index showed that a salary of some $116,000 is needed to afford a one-bedroom rental in Sydney. And yet the median wage is only $90,000. Brisbane and Adelaide – home to the nation’s fastest property price growth over the past decade – have also become unaffordable to someone living alone and earning the median income.
Of course, strained affordability reaches far beyond the Carrie Bradshaw market. National dwelling prices rose 3.3% in the year to May 2025 according to CoreLogic. A severe mismatch between housing supply and demand has pushed prices to record highs even as elevated mortgage rates dig into household budgets.
The good news is that dwelling investment was one of the few bright spots in the March quarter national accounts released last week, recording 2.6% growth in the quarter to be 5.6% higher over the year. That follows an improvement in dwelling commencements and approvals in the second half of last year. The bad news is that the forward-looking indicators suggest momentum has since stalled. Monthly dwelling approvals declined in each of February, March and April.
One year into the Federal Government’s aspirational target of 1.2 million new homes by the end of 2028-29, Deloitte Access Economics estimates that Australia will record fewer than 190,000 completions this financial year. That is well below the run rate suggested by the target. Indeed, from that point, more than 250,000 completions would be needed each year for the next four years to reach the target. The most dwellings Australia has ever built in a financial year is 219,000 in 2016-17.
Interest rate cuts from the Reserve Bank of Australia are improving affordability for those already in the market. Research from Roy Morgan shows 26.5% of Australian mortgage holders were at risk of mortgage stress in the three months to April – a 1.2 percentage point drop since the start of the rate cutting cycle in February. But the persistent undersupply of housing means dwelling prices will quickly respond to lower rates, and put further pressure on those locked out of the market.
The irony of Australia’s housing market is that higher house prices might actually be needed to unlock more housing supply. It’s a catch-22: Australia needs to build more homes to put downward pressure on dwelling prices. But Australia also needs higher dwelling prices to attract more investment from developers.
The profitability of Australia’s construction industry, as measured by gross operating profits to sales, remained at the lowest level since before the pandemic in March. Lifting dwelling completions to record highs will be impossible without decent profitability to attract private sector investment.
One way policymakers are seeking to address this is by reducing costs. State and local governments can enact regulatory and planning changes to speed up the approvals process and cut red tape. Stronger incentives for apprentices, better migration settings, simpler occupational licensing schemes, and less competition from a bloated public sector investment pipeline can all contribute to a more reliable supply of skilled construction workers.
The right policy settings are critical to lifting productivity in the construction industry. But it will take time for that to translate into a sustainable uplift in housing supply. In the near term, stronger building activity is likely to follow further increases in house prices, and housing affordability may get worse before it gets better.
This newsletter was distributed on 11th June 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Daniel Weber, Manager at Deloitte Access Economics
Click on the links below to read our previous Weekly Economic Briefings:
- Retail Forecasts: Rain check? (04 June)
- Slowing productivity? AI might need to take the wheel. (28 May)
- Reserve Bank cut rates to 3.85% amid global uncertainty (20 May)
- Jobs - Wages - Productivity?? (15 May)
