By Guest Blogger, Pete Wargent,
Next Level Wealth
There’s been plenty of discussion of the government’s seemingly unachievable target of 1.2 million well-located homes to be delivered over the course of five years.
In fact, the government itself seems to think the target isn’t achievable, quietly dropping the reference to ‘well-located homes’ and apparently pushing back the delivery time back by a year to 2030.
Overall, we’re approving around 15,000 to 16,000 dwellings per month, but this is far short of the 20,000 required to meet the target…so we’re already tracking well behind the curve over the past nine months
While it’s an inevitably nebulous concept given the constantly shifting nature of household formation, Shane Oliver of AMP estimates that we have a structural shortage of more than 200,000 dwellings…a figure that is rapidly set to soar towards 300,000.
Exacerbating these challenges, it’s taking longer and longer to get dwellings built, and particularly so for the medium- and higher-density projects.
This doesn’t mean that the housing supply challenge can’t be solved – eventually a serious supply response will come as housing prices rise - but it does mean that the supply shortage will get worse before it begins to get better.
Population projections are ever-changing in Australia, with the Australian Bureau of Statistics and the Intergenerational Reports frequently releasing low, middle, and high-range scenarios for the long run.
The big picture is that Australia began to run a high immigration program in the early 2000s and through the early years of the resources investment boom, and this has continued practically ever since (with a brief hiatus during the pandemic and the related closure of the international borders).
Australia’s Federal Budget projects that after a wild boom in Australia’s population following the post-pandemic reopening of the borders, net overseas immigration will gradually slow to 225,000 over the next couple of fiscal years.
Source: Australian Treasury
Population projections have often undershot the reality, however, at least in part because of the ongoing surge in temporary visa holders, including for international students, graduate visas, and working holidaymakers, for example.
Overall, it seems increasingly likely that Australia will increase substantially from 27½ million today to around 33 million by 2040.
It was even reported this week that Melbourne’s population is expected to explode to 39 million by 2050, which is truly an astonishing figure!
In all likelihood, we will have a lot of new bodies to house, and it looks like it's going to be a heck of a squeeze.
Australia's migration-driven growth and housing supply
Unlike many countries in Asia and Europe, Australia still has a natural growth component to its population increase (more births than deaths), largely because the immigration program has deliberately focussed on those aged under thirty.
Meanwhile the housing market is suffering from supply bottlenecks and delivery gaps, related to planning delays, steepling construction costs rising by around 50 per cent over the past five years, skilled labour shortages, and tighter monetary policy.
Construction and development insolvencies have hit a record high of late, totalling more than 2,830 in fiscal year 2024, as developers were caught out by fixed price contracts and disastrous cost overruns.
There is also an ongoing mismatch between housing supply and the demand for various property types.
Are we building the right types of homes in the right locations to meet demographic needs, or are we continuing to under-deliver in high-demand areas in Sydney, Melbourne, and south-east Queensland?
I believe that we are at the nadir of the residential construction cycle, but remain wary about the next apartment construction boom, with so many new projects tending to be riddled with expensive defects.
Rental crisis at the lower end
The housing shortages are clearly having an outsized impact on the rentals market, with rental vacancies rates tracking at around record lows, and advertised rents exploding higher since 2020.
Household sizes are now increasing in response to the rental crisis, with youngsters opting to stay with parents for longer, more renters taking on flatmates, and share house use increasing.
In previous decades governments supplied much of the social and affordable housing, but aside from a brief policy stimulus under the Rudd government during the global financial crisis, the public sector has largely stepped away from funding public housing.
Following the 2025 election landslide, the Labor government will instead focus on tax incentives to grow investment in the nascent Build to Rent sector towards $10 billion per annum by 2030.
All supply helps to fix the challenge, but still the numbers aren’t huge, and the build to rent projects tend to charge rents that are more expensive than average to generate the desired yields.
The outlook and opportunities
Tighter borrowing capacities have forced many homebuyers and investors in cheaper regional markets and outer-suburban locations in the capital cities.
The likely consequences of the persistent supply-demand imbalance include undue pressure on renters in the bottom quintile of the housing market, and first homebuyers being locked out by tight lending standards, including APRA’s 3 percentage points lending assessment buffer.
The Labor government is set to introduce a 5 per cent deposit scheme for first homebuyers from January 2026, while changing the treatment of HELP debt to enhance borrowing capacity for the cohort with graduate and educate liabilities.
As such, as mortgage rates fall SQM Research forecasts prices increases of up to 15 per cent over the year ahead, driven forward by the sub-$1 million price point.
Melbourne will lead the next stage of the upswing in the housing market cycle, having lagged other capital city markets since 2020.
Pete Wargent
petewargent.blogspot.com.au
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