Housing demand is hot, supply is not
With strong demand and lagging supply in the housing market, prices continue to rise as consumers search for alternatives.
Recent data shows that Australia’s housing market remains tight, with strong demand and lagging supply driving rising prices - a trend that is unlikely to resolve itself anytime soon.
Social trends compound that population growth in generating demand for housing. According to the Australian Bureau of Statistics (ABS), the average household size across all households in Australia was 2.48 in June 2025, down from 2.60 two decades ago. This is partially driven by an increase in the number of people living alone - at 27.5%, the share of lone-person households in Australia is at its highest level on record. As a result of these trends, even if the Australian population were stable, demand for housing would increase.
However, the average size of group households did spike in June 2023. This could reflect young people deciding to live in larger households to keep housing expenses low when the cost of living crisis was at its peak.
Dwelling commencements are heading in the wrong direction, suggesting that housing supply is likely to continue lagging demand. In the June quarter, new private housing commencements fell 6.6% in seasonally adjusted terms compared to the March quarter, and are 0.9% lower than 12 months ago, according to the ABS.
Worker shortages and weak productivity are factors constraining housing supply. BuildSkills Australia estimates that the construction workforce is 116,700 workers (roughly one-quarter of the workforce) short to achieve the target of 1.2 million new homes by mid-2029. This is further compounded by residential construction productivity decreasing by roughly 20% over the last decade.
Dwelling approvals, the pipeline to dwelling commencements, are also proving lacklustre. According to the ABS, the average number of dwelling approvals in the three months to August 2025 was 15,953. While this represents a 12.2% increase over the past 12 months, it is still 3.2% lower than the monthly average of 16,478 in the 2010s decade.
The outlook for dwelling supply is more concerning when non-house dwelling approvals, which include higher density dwellings like apartments, are considered. Approvals for non-house dwellings averaged over the three months to August 2025 were 8.8% below last decade’s monthly average.
What does all this mean for housing market outcomes?
Strong demand and lagging supply may compound the housing affordability challenge. After a period of stability in late 2024 and early 2025, Cotality’s Daily Home Value Index shows that house prices have accelerated since February. As of 8 October 2025, the Home Value Index average across Sydney, Melbourne, Brisbane (inc Gold Coast), Adelaide and Perth was up 4.5% year-on-year. There is potential going forward for affordability to become more challenging, though in part that will depend on what the Reserve Bank does.
Some consumers are searching for better-value options. Three-bedroom apartments have been emerging as a potential substitute for detached housing for consumers looking for more space. Urbis note that the share of three-bedroom apartments sold has risen from 8% to 22% of apartments between 2015 and 2025, as developers have finally provided some apartment living options for family owner-occupiers. Over the same period, the share of one-bed apartments sold has declined from 34% to 19%.
This newsletter was distributed on 16th October 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Andy Crossley, Manager and David Li, Graduate Economist at Deloitte Access Economics.
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