Are We Ready to Debate the Housing Crisis and Face Reality
5 min
ANALYSIS:
As the final-term Reserve Bank Governor, Philip Lowe, faced the House of Representatives Standing Committee on Economics last Friday, a sigh of relief was shared amongst mortgage holders that “the worst is over” regarding the fight against inflation. It only took 12 interest rate hikes to bring inflation at bay in the quickest contraction in monetary policy in Australia’s modern history. As many Australian mortgage holders are now tipping over the wretched mortgage cliff, we see signs within leading economic indicators such as retail sales, consumer business confidence and mortgage arrears, that there is much more pain to come.
To many people’s surprise, the economy has been incredibly resilient, despite stubbornly persistent rental and service inflation. Raising interest rates is unlikely to reduce these two lingering inflationary pests substantially. As further critical economic data comes to light, we believe the justification for further interest rises will soon abate.
At the same time, Australia’s largest trading partner, China, is experiencing the unthinkable ‘deflation’, which may have a contagion impact on our economy and prompt us to anticipate rate cuts sooner than we expect, leading to revisions in rate forecasts.
As the inflation storm clouds begin to settle down, we can assess the damage caused, especially concerning ongoing cost-of-living crises, inequitable wealth distribution, rental crises and falling labour productivity.
The Structural Problem
The most significant casualty is the housing market, specifically its ability to supply sufficient housing to keep rents stable and improve affordability. At the peak of the interest rate cycle and property unaffordability, it is economically strange that property prices are bucking the trend and have increased 9% from the trough to its current heights, reinforcing that something is fundamentally wrong with the housing market.
The first glaring issue in our current structural problem is rampant rental growth. CoreLogic’s latest July figures confirm annual national rental growth at 9.4% p.a. In the months ahead, there will surely be a vibrant, albeit distressing, public debate examining perhaps one of the biggest threats to our economy and quality of life: the dreaded ‘Housing Crisis’.
Our current Prime Minister, Anthony Albanese, will no doubt attempt to unify the states and territories to find an appropriate, balanced solution to ease the rental crisis and increase the supply of properties as he goes into this week’s cabinet meeting.
Rental Market and Rent Freezes
Sydney, and Australia more broadly, grapple with a clear rental crisis as we observe low vacancy rates (0.9%) and soaring rents.11 With 31% of Australians being renters,12 these issues impact a large, vulnerable demographic, who feel the full impacts associated with cost-of-living pressures. This is playing out not only as an economic issue but as an ongoing social issue that warrants immediate attention from politicians.
11 Vacancy rates: August 2022 (domain.com.au).
12 Housing statistics in Australia: home ownership & rent | Savings.com.au.
13The ACT is the only territory to limit rent increases but tenant groups say gaps in protection leave tenants vulnerable | The Canberra Times | Canberra, ACT.
14 https://www.abc.net.au/news/2023-08-11/asx-markets-business-live-news-philip-lowe-rba-inflation/102716942.
As a result, many people across the political spectrum propose rent control as a solution. However, such measures may backfire, as seen in ACT.13 As Philip Lowe recently made clear, rent control could be a short-term solution to improve housing affordability; however, in the long-term, such a solution will prove inadequate as the fundamental structural problem of low housing supply will persist.14
This is because a cap on rent increases would discourage property development and investment, leading to a lower supply and higher rents in the long-term, as observed in San Francisco and Ireland.15 These rental rules burden property investors as they are not given a reprieve from an increase in mortgage repayments and holding costs, which will drive much-needed investment away from the property sector.
When it comes to increasing supply, property developers and investors are the essential lubrication that enable the property machine to function. Therefore, even rumours of
additional tax for property investors is enough to spook and jeopardise the pipeline for much-needed developments, which is already significantly insufficient to meet current demand.
As Philip Lowe echoed his view on this matter at the parliamentary committee, government interventions in the rental market via rent freezes and caps have immediate short-term gains. However, it does not resolve long-term structural problems and only exacerbates these issues in the future.16
The key to addressing the crisis lies in increasing the housing supply. Government inefficiencies, especially with regard to planning systems, stifle progress. Efforts to aid homebuyers through subsidies, which has been a popular policy in the past, can also inadvertently drive-up housing prices.
Why has so Much Gone so Wrong so Quickly
There has been a long history of housing stock deficiency in Australia; we need to build enough property to meet demand, especially since the immigration reprieve experienced during COVID-19 lockdowns is slowly fading away. Once international borders reopened, net migration skyrocketed, with future forecasts migration and total population growth remaining elevated.
This is placing further pressure on our fragile construction industry, which has experienced a once-in-a-lifetime perfect storm. This is especially so for builders operating within the residential sector, who are locked into fixed-price contracts, and have dealt with construction costs flying up by 30%-40%, La Niña (a climate pattern leading to greater rainfall in Australia), supply chain issues, rising interest costs, labour shortages, as well as COVID-19 lockdowns and disruptions, whilst on thin margins. Unsurprisingly, ASIC data shows 1031 construction companies falling to the liquidator’s knife – more than anytime experienced over the past decade.
Project Feasibility
Traditionally, many medium to large-scale development projects take 3-6 years to obtain necessary approvals, then a further 8-12 months to obtain construction certificates. This is followed by off-plan marketing campaigns to get enough sales to meet financiers’ requirements even before the first shovel hits the ground. Not to mention it also takes time for councils to consider re-zoning.
Construction costs over the past three years have skyrocketed by 30-40% due to inflation and labour shortages within the sector. Land values typically remain constant and do not provide room for adjustment. This has resulted in many approved projects being shelved as developers wait for property prices to increase enough to compensate for construction costs, holding costs and greater demand for purchasers to buy off-the-plan.
Ultimately, the supply component of the property market is driven by the private sector – an army of mum-and-dad investors to established property developers. Unfortunately, making money on property projects is at one of its most challenging times in decades, further contributing to the challenge of providing property supply to the system.
Planning and Rezoning Process
We also want to avoid knee-jerk, desperate planning outcomes as well as unnecessary rezoning of more farmland and urban sprawl, which have only been short-term fixes to the underlying problem of inadequate supply; however, in most cases, this does not generate net gains as the benefits are outweighed by government spending and immense costs on infrastructure projects.
It takes 4-8 years for councils to consider large-scale rezoning projects properly. Nevertheless, we should look at best practices and improve the bureaucratic red tape to avoid future property price and rental increases; however, make no mistake – there is no quick fix.
Solutions to the housing crisis will involve all levels of government coordination, patience, well-measured policies, and a deep understanding of the delicate balance between different stakeholders’ interests.
In short, the housing crisis is here to stay for several years. We will continue having to talk about it and lay blame to governments, developers, builders, and investors. The government’s job is to make the planning system more efficient, promote property development and investment, and let the market deliver supply based on demand.
Ultimately, market forces will result in property prices remaining elevated and, over time, property will attract capital once the perceived market risk normalises. We should then see the necessary supply to meet demand.
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The 2026 McGrath Report warns that without urgent reforms to planning, infrastructure and construction, housing affordability will continue to slip beyond reach for most Australians.
3 min
Australia’s housing market has reached a critical juncture, with home ownership and rental affordability deteriorating to their worst levels in decades, according to the McGrath Report 2026.
The annual analysis from real estate entrepreneur John McGrath paints a sobering picture of a nation where even the “lucky country” has run out of luck — or at least, out of homes.
New borrowers are now spending half their household income servicing loans, while renters are devoting one-third of their earnings to rent.
The time needed to save a 20 per cent deposit has stretched beyond ten years, and the home price-to-income ratio has climbed to eight times. “These aren’t just statistics,” McGrath writes. “They represent real people and real pain.”
McGrath argues that the root cause of Australia’s housing crisis is not a shortage of land, but a shortage of accessibility and deliverable stock.
“Over half our population has squeezed into just three cities, creating price pressure and rising density in Sydney, Melbourne and Brisbane while vast developable land sits disconnected from essential infrastructure,” he says.
The report identifies three faltering pillars — supply, affordability and construction viability — as the drivers of instability in the current market.
Developers across the country, McGrath notes, are “unable to make the numbers work” due to labour shortages and soaring construction costs.
In many trades, shortages have doubled or tripled, and build costs have surged by more than 30 per cent, stalling thousands of projects.
Need for systemic reform
McGrath’s prescription is clear: the only real solution lies in increasing supply through systemic reform. “We need to streamline development processes, reduce approval timeframes and provide better infrastructure to free up the options and provide more choice for everyone on where they live,” he says.
The 2026 edition of the report also points to promising trends in policy and innovation. Across several states, governments are prioritising higher-density development near transport hubs and repurposing government-owned land with existing infrastructure.
Build-to-rent models are expanding, and planning reforms are gaining traction. McGrath notes that while these steps are encouraging, they must be accelerated and supported by new construction methods if Australia is to meet demand.
One of the report’s key opportunities lies in prefabrication and modular design. “Prefabricated homes can be completed in 10–12 weeks compared to 18 months for a traditional house, saving time and money for everyone involved,” McGrath says.
The report suggests that modular and 3D-printed housing could play a significant role in addressing shortages while setting a new global benchmark for speed, cost and quality in residential construction.
Intelligent homes
In a section titled Weathering the Future: The Power of Smart Design, the report emphasises that sustainable and intelligent home design is no longer aspirational but essential.
It highlights new technologies that reduce energy use, improve thermal efficiency, and make homes more resilient to climate risks.
“There’s no reason why Australia shouldn’t be a world leader in innovative design and construction — and many reasons why we should be,” McGrath writes.
Despite the challenges, the tone of the 2026 McGrath Report is one of cautious optimism. Demand is expected to stabilise at around 175,000 households per year from 2026, and construction cost growth is finally slowing. Governments are also showing a greater willingness to reform outdated planning frameworks.
McGrath concludes that the path forward requires bold decisions and collaboration between all levels of government and industry.
“Australia has the land, demand and capability,” he says. “What we need now is the will to implement supply-focused solutions that address root causes rather than symptoms.”
“Only then,” he adds, “can we turn the dream of home ownership back into something more than a dream.”
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