Undersupply of dwellings has led to a sharp increase in property prices in Sydney and Melbourne and ‘a co-ordinated strategy’ is needed to solve the resulting housing affordability crisis.
The sharp rise in dwelling prices in Sydney and Melbourne particularly over the last few years largely reflected that the supply of housing had been unable to keep pace with strong demand. 
The latest analysis by RiskWise Property Research shows unless measures are undertaken to boost dwelling commencements and supply, housing affordability cannot be adequately addressed.
Although middle-ring capital city suburb development has increased in recent years, especially for high-rise apartments, the supply of family appropriate, medium-density housing must be increased.
This imbalance in dwelling construction has been a major contributory factor to housing affordability challenges in the two most populous capital cities, remembering that rental properties and owner-occupied ones are not fully substitute products.
In particular, units that are used by owner-occupiers are larger than units that are typically used as rental properties and, more importantly, the price per square metre of rental properties is higher than the price per square metre of owner-occupied properties, mainly in Sydney and Melbourne.
This means that, overall, rental units in Sydney and Melbourne are significantly less affordable than units that are owner-occupied.
In addition, he said if Labor were to win the next Federal election and introduce reforms to both negative gearing and capital gains tax, this would further result in a reduction in dwelling commencements unless measures were taken to encourage new supply.
It should be noted that investors have a major impact on dwelling prices, both during a rising market as well as during periods of price reductions.
According to the RBA, investors can amplify credit and dwelling price cycles, on some occasions contributing to financial stability risks.
Investors purchase more off-the-plan dwellings than owner-occupiers, so they might contribute to larger upswings in construction with the risk of future oversupply for some types of properties or in some locations. Conversely, elevated levels of investor activity are amplifying any subsequent downswing, increasing risks to the broader housing market and household sector.
Further, some areas that have a large proportion of properties that are not suitable for owner-occupiers are likely to experience a greater price reduction compared to areas suitable for owner-occupiers. 
A prime example of this is areas close to major CBDs where there are a large proportion of rental properties, many of them in high-rise apartment buildings.
Figures from the NSW government showed Greater Sydney would need around 725,000 additional homes over the next 20 years to accommodate a growing and ageing population.
The population of the city is projected to grow by around 1.74 million people by 2036, and in Melbourne it is predicted to pass 10.1 million by 2051 - the highest population growth of any city in Australia.
Housing unaffordability and its connection with housing supply was recognised in 2008 by a Select Senate Committee on Housing Affordability in Australia stating, ‘the sharp increase in house prices in Australia reflects the fact that the supply of housing has been unable to keep pace with strong demand’.
In the long run, rising demand won’t result in much higher house prices if more housing can be built.
Rapid population growth in Australia in the 1950s was matched by record rates of home building, and house prices barely moved.
But over much of the last two decades, constraints have limited new supply that would normally respond to higher demand.
One issue was planning rules at a state government and local level which restricted the construction of more homes in the inner and middle-ring suburbs creating an under-supply of medium-density housing in what is sometimes described as the ‘missing middle’.
Basically, not enough medium-density housing, such as mid-rise and low-rise apartments, townhouses and terraces, have been built in the established suburbs closest to jobs and existing infrastructure.
Although there have been more high-rise apartments, overall dwelling supply has not matched population growth, resulting in higher prices, plus these apartments do not appeal to families.
Some steps, however, are being taken to rectify this. Both the NSW and the Victorian state governments have acknowledged the supply issue and introduced strategic initiatives to address them.
In NSW the Low Rise Medium Density Housing Code allows one and two-storey dual occupancies, manor houses and terraces to be built under a fast-track complying development approval scheme.
The Victorian government has formed the Precinct Structure Planning system to deal with strategic planning in relation to the development of growth area land and add certainty to the timing of development.
In addition, a number of NSW councils have requested an exemption from the Low-Rise Medium Density Code SEPP from the Minister for Planning and Housing.
Five have already been officially granted a 12-month exemption.
Some have also amended their Local Environmental Plans to streamline the approval process.
However, a co-ordinated strategy should be put in place to encourage the construction of owner-occupier appropriate dwellings in the middle-ring suburbs.
Without a strategic and comprehensive solution, it is likely that the current supply and demand patterns will once again lead to escalating prices.
We advocate increasing density in middle-ring and outlying areas of the cities, provided there are adequate transport solutions, re-zoning in key transport corridors and train lines, to access employment.
A significant increase to dwelling density along already existing transport corridors is less costly and can be delivered more efficiently than the development of new transport corridors and train lines.
While development in middle-ring suburbs has increased in recent years, especially in Sydney, today’s record levels of housing construction are the bare minimum needed to meet the elevated level of population growth in the two major capital cities, which is being driven by net overseas migration.
Other measures should be undertaken at the state level, particularly in relation to planning, greenfield land releases, rezoning and a more co-ordinated approach between the states and the local governments in relation to those matters.
In addition, federal to state governments and state to local governments should provide incentives for meeting pre-approved development targets and increasing dwelling supply.
Measures should also be implemented to accelerate the planning and approval processes and to incentivise local governments that development meet pre-agreed targets in relation to dwelling supply.
Allocation of significant funding to infrastructure upgrades in many urban and regional areas in the 2018 Federal Budget would have a positive impact on dwelling supply.
These include major projects such as the Melbourne North East Link (the federal government has committed $1.75 billion to Victoria’s largest ever transport project), the rail upgrade in Monash ($475 million has been allocated to the planning and pre-construction work), and the first stage of the North South Rail Link, connecting two of the busiest commuter rail lines in Sydney.
However, additional infrastructure upgrades are still required, particularly in Sydney, to improve public transport accessibility to the Sydney CBD, with a high proportion of services sector jobs being created in central urban locations. 
Governments should also be encouraged to increase land supply release and development through co-ordinated strategy and targets.
While land supply in Sydney and to a lesser extent Melbourne is limited in the inner and middle-rings, there is a certain level of supply in surrounding suburbs.
Much of this greenfield development in Melbourne is less than 30 kilometres from the CBD; in Sydney it tends to be more than 40 kilometres from the CBD.
Land releases in the outer suburbs are essential, particularly in Sydney to support the other supply-related measures that have been detailed above.
The outer suburbs are significantly more affordable, and they provide an opportunity to first home buyers to enter the property market.
