As Australians struggle with a housing shortage and an affordability crisis, a leading economic analyst has gone against the grain - suggesting home prices will need to continue to rise in order to see more new housing.
It sounds counterintuitive, but Deloitte Access Economic Partner Stephen Smith believes housing supply in Australia will only increase materially when prices rise to the point that it becomes feasible for many property developers to proceed with projects that currently don’t stack up financially.
The details
Stephen Smith says Australia’s expensive housing - a product of constrained supply and strong demand - can be best illustrated by the nation’s recent appearance in The Economist magazine’s international ‘Carrie Bradshaw Index’.
The index, named after the central character in the late 90s/early 2000s American TV series ‘Sex and the City’, is a measure of how much someone must earn to comfortably live alone in their own apartment in a big, world-class city.
The ‘Carrie Bradshaw Index’ showed that an annual salary of around $116,000 is needed to afford a one-bedroom rental in Sydney.
And yet the median wage in Sydney 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,” Stephen Smith says.
The same unaffordability confronts Australian homebuyers, with Deloitte Access Economics publishing the chart above to show how the gap between average weekly earnings and dwelling prices has blown out over the last 14 years.
Stephen Smith says the current state of housing in Australia is a “Catch-22”:
“The irony of Australia’s housing market is that higher house prices might actually be needed to unlock more housing supply,” he says.
“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.”
Research last year by AMP’s Chief Economist Shane Oliver estimated there was a shortfall of between 200,000 and 300,000 homes in Australia for the nation’s population.
Various strategies have been suggested to address this, including “big builds” by state governments to construct more social and public housing, cutting red tape to deliver more greenfields land for large-scale outer-urban housing developments, and changing planning and density rules in established suburbs.
While these initiatives are to be welcomed, the fact remains that the overwhelming bulk of housing in Australia is delivered by the private market - and the private market will only deliver housing if it believes it can make a profit.
“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 (2025),” Deloitte Access Economics Partner Stephen Smith says.
Deloitte estimates that less than 190,000 new homes will be completed during the 2024-25 financial year - the first full 12 months of the Federal government’s National Housing Accord.
The Accord has an aspirational target of building 1.2 million new homes by the end of 2028-29.
“More than 250,000 completions would be needed each year for the next four years to reach the target,” Stephen Smith says.
“The most dwellings Australia has ever built in a financial year is 219,000 in 2016-17.
“Lifting dwelling completions to record highs will be impossible without decent profitability to attract private sector investment.”
Stephen Smith says policymakers can make it easier for builders 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.”
These policy settings are important for lifting lagging productivity in the building industry, Stephen Smith says, “but it will take time for that to translate into a sustainable uplift in housing supply.”
While the Federal and state governments want to see greater density in Australian cities, primarily in the form of apartments located near existing infrastructure and transport hubs, new apartment approvals remain low.
At the same time, capital city apartment prices have soared.
Building consultant Urbis says prices jumped a record 24% in the December quarter of 2024 to an average of $19,000 per square meter, driven higher by increased building and labour costs.
While apartment prices have escalated, many developers still believe big inner-city projects don’t offer a good enough return on investment and risk.
Michael Clark, a director at Sydney’s Abadeen Group, which specialises in up-market developments, recently revealed the cost breakdown of a “real world boutique apartment project located just 10km from the Sydney CBD”.
“Despite the headline sale price ($1.52 million), the developer walks away with just a 14.5% margin, only if everything goes according to plan!” he exclaims.
Deloitte Access Economics Stephen Smith believes there’s only one feasible way forward - even higher home prices.
“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.”