The Australian Housing Crisis: Government Policies Exacerbating the Issue

Australia is facing a worsening housing crisis, with house prices reaching new record highs, even in the midst of the most aggressive rate hiking cycle in history, and rents are following suit.

While the Australian government has acknowledged the issue, measures aimed at improving housing affordability have been called ill-considered because of their potential to exacerbate the issue, rather than overcome it.

Up until now, the actions taken by the government to increase housing affordability have contributed to increased demand, neglecting the crux of the issue - which is that Australia simply does not have enough homes to house a rapidly growing population.

Fueling the fire

Rather than taking a supply-side approach, it seems the government’s big plan to abate skyrocketing housing costs is to assist people in affording the increased buy-in prices, with initiatives like the First Home Guarantee and shared equity schemes.

The government’s Home Guarantee Scheme offers three different types of guarantees that extend to regional first home owners (Regional First Home Buyer Guarantee), first home owners (First Home Guarantee), and eligible single parents (Family Home Guarantee).

There are also stamp duty concessions and exemptions for eligible first home buyers.

These initiatives are a nice enough thought, but they inevitably add more demand to an already severely constricted supply of homes. 

In addition to home buyer incentives, Australia’s housing market is also subject to rapidly growing demand from record-high migration figures.

In September this year, our migrant intake likely reached an annual record of 500,000 people, according to former deputy secretary of the Immigration Department, Abul Rizvi, as reported by Michael Reed of Australian Financial Review.

And it's set to get worse. 

In the five years to 2027, it’s expected that migration alone will add 1.5 million people to Australia’s population. Simultaneously, the Albanese government only intends to build 1.2 million homes in the five years to 2029. 

With the combined pressure of migration, natural population growth, and overseas investment, the figure doesn’t even scratch the surface.

House price pressure

House prices are responding to the added demand, with national home values growing 7.6 per cent in the nine months from January alone, according to CoreLogic. 

Since 2020, home values have grown astronomically, with Adelaide house prices growing 40 per cent since June 2020 and Brisbane values growing 53 per cent since March 2020.

And there looks to be no end in sight. 

Accounting firm, KPMG, this week released a report forecasting house prices to rise nationwide by 4.9 per cent during the remainder of this financial year, and then a whopping 9.4 per cent in the year to June 2025. That’s almost 15 per cent growth in 18 months.

And the growth isn’t restricted to house prices either. Rents have soared upwards at the hands of record-low vacancy rates. 

SQM Research released figures this week showing that the national vacancy rate had fallen yet again in October, reaching a measly 1 percent. The severe lack of supply has led to asking rents rising by 15.5 per cent in the 12 months to November.

There seems to be a common sentiment echoed by some of the industry experts - supply is constrained and demand is out of control, and there’s no real evidence that supply-side issues are being proactively addressed.

KPMG’s chief economist, Dr Brendan Rynne, says that supply-side issues will continue to reign supreme over house market movements in the foreseeable future.

“House and unit prices will then accelerate further in the next financial year as dwelling supply continues to be limited, due to scarcity of available land, falling levels of approvals and slower or more costly construction activity,” said Dr Rynne. 

“The supply issue will combine with several other factors to push assets prices up – higher demand due to heavier migration; anticipated rate cuts moving into FY25, and potentially relaxed lending conditions;  high rental costs pushing renters to look to buy instead;  barriers to developers building new homes; foreign investor demand picking up again; along with the longer post-pandemic demand for more space as people continue to work from home.”

The housing crisis seems to have blindsided the government, despite figures painting an obvious picture that dwelling completions simply haven’t been keeping up with demand over the past couple of decades.

According to MacroBusiness, the discrepancy between population growth and dwellings completed became evident when the population boomed from 2004 to 2008, while completions dropped off, only to pick up again in 2013.

The supply issue has been entrenched in 20 years of poor planning and oversight of the data. But the government is hopeful to fix the crisis in just five years.

Credit where credit is due

While the bulk of government interest seems to be in band-aiding affordability pressures for home buyers rather than tackling the complex beast of boosting supply, there have been some applaudable intentions.

The Albanese government announced ambitions to build 1.2 million new, well-located homes in the five years from July 2024 as part of their plan to increase affordability.

But regardless of good intentions, the (much-needed) figure has been labelled unlikely and unrealistic.

To achieve its target, the government would need to build 240,000 homes every year from July 2024 until July 2029. 

But if history is anything to go off, that’s highly unlikely. Australia has only ever built more than 220,000 new homes in one year once - in 2017, according to MacroBusiness.

The Housing Industry Association’s (HIA) chief economist, Tim Reardon, called the target ‘challenging’.

Other industry experts have echoed his concern. At the Australian Financial Review’s (AFR) Property Summit in September, Western Australia developer Nigel Satterley told the summit that we would be lucky to build even half the figure, reported AFR’s Michael Bleby. He named a lack of workers as the greatest obstacle.

Others named planning as the main hindrance. 

“There’s a problem with local government. In New South Wales, it’s taking seven to 20 years to get a new rezoning through for residential. We’re talking about building houses over the next five years. That’s a bit of a problem,” said Robert Lynch, chairman of Tamawood - a residential building company.

Concerningly, the Australian Bureau of Statistics (ABS) released lending statistics just this month, indicating that loans for newly built homes have remained at around the lowest seen in the past two decades. The only other time since 2002 that levels have seen such lows was in 2008 - when lending for new homes dipped briefly during the Global Financial Crisis.

While we won’t see the effects straight away, HIA senior economist, Tom Devitt, warns the  repercussions will become evident next year.

“This low volume of lending and approvals will produce a decade low volume of new housing starts in 2024,” said Mr Reardon.

He sees the decrease in new home lending, which is likely a side effect of rate rises, as a hindrance to achieving the 1.2 million new homes.

“This slowdown in lending for new housing will make it increasingly difficult to reach the Australian government’s target of building 1.2 million new homes in five years,” said Mr Devitt.

So, while the Australian government is acknowledging the supply-side issue, we’re yet to see the major reforms needed to upgrade planning processes, bolster the construction workforce, and remove the bottlenecks hindering new home construction.

Until a supply-side approach is taken seriously, they’re going to need more band-aids.