Here’s why building capacity must double to meet our housing goals

We know we are experiencing a housing crisis, due to a shortage of dwellings to buy and rent and this has, in part, been brought about by challenges within the residential construction industry.

Capacity constraints, rising costs, and tight housing supply have driven up prices for existing homes and rental rates.

PropTrack examined the significant price surge in construction costs over the four years since the pandemic onset, highlighting how these factors contribute to buyers facing the worst housing affordability in decades.

According to PropTrack's data, renters are also in a tough spot, with vacancy rates nearing record lows and rental prices surging by 42% in capital cities and 41% in regional areas since the pandemic began.

PropTrack's Senior Economist Eleanor Creagh said that over the past four years, rental vacancies have more than halved across the capital cities (-58%) and almost halved in regional areas (-47%).

These figures reflect the chronic shortage of housing, which, along with Australia's ongoing population growth, is expected to drive house prices and rents even higher.

Ms Creagh said that increasing the supply of housing is one solution to the affordability crisis, but the path to more homes is complicated.

Approvals for new construction remain challenging, with many pointing to the need for planning and zoning reforms to unlock new housing supply.

Victoria is streamlining planning processes, and NSW has announced extensive reforms to fast-track approvals for middle-density homes.

However, easing planning restrictions alone won't solve the issue.

Immediate challenges like construction capacity constraints and high costs need to be addressed to deliver enough new homes to meet demand.

New builds sidelined by higher costs

Unfortunately, the supply side of the housing market hasn't kept pace with demand.

Residential approvals and commencements are at their lowest in over a decade due to industry-wide pressures.

While there is a pipeline of approved homes awaiting construction, many are delayed or cancelled due to rising costs and skilled labour shortages.

Ms Creagh highlighted that currently, 1 in 5 approved homes isn't reaching completion, reflecting a slowdown in the building pace.

She said that developers face increased costs for labour, materials, and financing, which compress margins and make projects less feasible.

The backlog due to these delays further adds to the housing crisis, as not-yet-commenced dwellings represent a large portion of the approved housing supply that isn't being built.

This means that developers will only move forward with projects if they can meet their internal rate of return, meaning higher costs often lead to cancelled projects.

Additionally, skilled labour shortages and an increase in insolvencies among building firms contribute to the delays.

Bridging the construction gap

PropTrack's data show that the current rate of housing completions, just under 170,000 new homes per year, is below the prior decade's average and far from the 240,000 new homes required annually to meet Australia's housing goals.

Given current trends, completions could drop to 140,000, which would require almost doubling the building activity to meet the targets.

Ms Creagh highlights that to bridge this gap, the construction industry needs support to address capacity constraints, labour shortages, and high costs.

Potential solutions include targeted migration policies to address skills shortages, reintroducing stamp duty incentives for new homes, and encouraging industry innovation to increase productivity.

She further said that encouraging downsizing and replacing stamp duty with an annual land tax could also help optimize existing housing stock, while increased productivity through advanced manufacturing techniques can improve industry output.

In conclusion, these measures, alongside planning and zoning reforms, could help increase the housing supply and mitigate the ongoing housing crisis.

However, a concerted effort is needed to meet demand and stabilize the market.

Addressing these challenges will require creativity and coordination, but the urgency of the housing crisis demands decisive action.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.