Australia's Housing Crisis: The Missing 1.3 Million Homes

In August 2023, the Prime Minister secured an important national agreement to further boost the housing supply and improve home affordability.

The national cabinet agreed that the states and territories would receive incentive payments of $15,000 for every new home they helped deliver above a previous Federal target of building one million homes over five years.

The new target is aimed at assisting the Commonwealth reach its updated target of 1.2 million new homes from July 2024.

It’s part of a range of sweeteners Anthony Albanese has rolled out over the past 18 months aimed at state and local governments to help bring “well-located” new housing supply online quickly, in a bid to solve Australia’s chronic housing shortage.

There’s some irony in the fact so much money is being made available to state and local governments to deliver housing, especially because it’s those levels of government that have been accused of getting us into the housing mess we are in today.

The former RBA economist and his stunning accusation

Chief among the critics is Tony Richards, a former head of economic research and economic analysis at the Reserve Bank of Australia. 

In a research paper called “How to solve Australia’s housing crisis”, published in May 2023, Dr. Richards was blunt.

“The growth in Australia’s housing stock has dramatically slowed in the last 20 years, a surprising outcome given demand”, he writes.

“The blame lies firmly with local councils and state governments.”

Tony Richards says their actions have meant that Australia has “lost” an astounding number of homes - 1,333,187 to be exact. 

Please explain…

To produce these findings, Tony Richards looked at the rate of growth in the number of dwellings in Australia between 1961 and 2021 and compared it to population growth.

Between 1981 and 2001, as Australians embarked on a longer-term trend towards forming smaller households, the number of new dwellings being produced each year grew faster than population growth - on average about 17.4% according to Dr Richards.

But around 2001, something changed.

“If the relationship between the growth in the population and the housing stock seen in the 20 years to 2001 had been maintained over the (next) 20 years to 2021, Australia would have had around 1.3 million more dwellings than the 10.85 million dwellings reported in the 2021 census”, according to Tony Richards.

“The nation’s housing stock would have increased by about 220,000 dwellings per year over this 20-year period, rather than the growth of 153,000 per year that actually occurred.”

At face value this seems rather puzzling.

As Dr Richards points out, between 2001 and 2021 there was strong demand for housing, with “financial liberalisation and lower interest rates significantly increasing household borrowing capacity”. 

“Tax policies are generally considered to have favoured ownership of housing’, he says, “and state and federal governments have continued to provide assistance for first-home buyers.”

“What we have seen instead is a significant increase in the price of housing, relative to household incomes.”

“It is hard to escape a conclusion that the run-up in the price of housing over the past two decades must be related to inflexibilities in housing supply.”

And what is holding back that “supply”?

Dr Richards points to the lengthy planning, zoning and approval processes an average developer would have to go through to erect a multi-storey medium-density development in a middle-ring suburb of Sydney.

“The upshot is that the important tasks of home building and modernising our cities have become heavily reliant on individuals and companies whose main skill is navigating the development approval process and influencing local and state government officials to try to ease constraints on what can be built.”

“If we care about housing affordability and having a city that better meets the housing needs of its population ... we need a planning and approvals system that is easier for home builders to interact with, rather than one that is complex, expensive and corruption-prone.”

The backlash

Not surprisingly, talk of local councils being hostage to NIMBYs and standing in the way of medium-density developments goes down like a lead balloon with the Australian Local Government Association.

President Linda Scott said the nation’s 537 councils had an obligation to plan for existing and future residents.

“We must…invest in the physical and social infrastructure necessary to build vibrant communities, not just homes,” she told the Financial Review.

A number of experts have also taken issue with Tony Richards’ assertions, with economic commentator David Llewellyn-Smith describing it as “eggheaded rubbish”.

Still, there’s no doubt that Tony Richards has raised serious questions about the willingness and ability of state and local governments to take genuine steps to drastically improve the supply of housing in Australia, particularly “well-located” medium-density housing in inner and middle suburbs - exactly the kind of housing the Federal government is now desperate to build.

His work also raises the tantalising question: would we now be in a frantic race to try to build 1.2 million homes over 5 years to fix a chronic housing shortage if those 1.3 million homes councils and state governments allegedly blocked over the last 20 years had actually gone ahead?