Australia’s housing crisis: hardship and hope

Australia's housing and rental markets remain uncomfortably tight as households continue to contend with high housing costs in a competitive market. Specifically, homeowners are feeling the effects of higher interest rates, renters are facing record low vacancy rates, and prices are rising again, which is worsening affordability for prospective homebuyers. These trends reflect longer term issues with Australia’s housing supply, and the recent surge in population growth.  So, can we expect a housing recovery anytime soon? 

At the end of last year, the housing market seemed to show signs of beginning to slow down as some downward pressures on prices emerged. Higher interest rates would usually suggest a decrease in house prices. However, new data released by CoreLogic shows that the Home Value Index is still on the rise, with a 0.6% increase last month. While some of the recent recovery in prices is driven by expectations of interest rate cuts later in the year, the key factor for rising house prices is chronic undersupply. 

Put simply, the root of Australia’s housing crisis is that supply is failing to keep up with rising demand. Demand has escalated in line with strong population growth driven by record high net overseas arrivals through 2023. Recent growth in housing commencements has failed to keep up with this population growth, let alone start to address the structural undersupply. The Federal Government’s target of building 1.2 million new homes over the next five years is ambitious, particularly given any increase in the pace of construction is off to a slow start as builders grind through a backlog of projects. 

That backlog partly explains recent low levels of dwelling commencements. As the construction industry works through existing projects, there is less capacity to start new builds. This backlog of construction work stems from pandemic-era challenges. Due to lockdowns, worksite access was limited, hindering progress on both residential and non-residential construction projects. Emerging from the pandemic, higher material prices, higher wages and shortages of labour have continued to weigh on the level of construction activity. These setbacks have only been exacerbated by insolvencies in the construction industry, which has left some homes only partially built and in need of new contractors. 

The backlog of construction projects appears to have peaked, but the issue remains a key constraint. Over the past two years, on average almost 103,000 houses have been under construction at any one time. That is more than two thirds higher than the average seen over the decade prior to the pandemic, as shown in Chart 1. This is not a good news story, but an example of the blockage that is preventing a faster upswing in housing supply.

Chart 1: Dwellings under construction

Source: Australian Bureau of Statistics

In better news, the government has proposed several new policies to address the shortage alongside the new homes target, including the shared equity ‘Help to Buy’ scheme and the National Housing and Homelessness Plan. The National Housing and Homelessness Plan aims to help inform housing policy by highlighting the reforms required for the Australian housing market. While this plan is still in development, increased collaboration between the Federal Government and states and territories is a hopeful starting point to alleviating the housing crisis. However, there is still a long way to go and no quick fix to what has become a systemic supply issue.

This newsletter was distributed on 13 March 2024. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Amy Kerrigan, Graduate Economist at Deloitte Access Economics

Click on the links below to read our previous Weekly Economic Briefings: 

• International Women’s Day (08 March)
• Inflation steady while retail spend remains muted (01 March)
• ‘Right-sizing’ the workforce and retaining migrant talent (22 Feb)
• Taylor-made: economic trends from the Eras Tour (15 Feb)