Why living 80s style would mean we’d need 1.2 million fewer homes
The housing crisis could be addressed without the need for more dwellings, the RBA assistant governor says
3 min
The Reserve Bank assistant governor says how we live now is contributing to the housing shortage.
The National Housing Accord announced by the Albanese Government aims to build 1.2 million new well located homes over the next five years, starting from 1 July. The Accord is an agreement between the Federal Government and the states and territories to work together to raise the supply of homes. It begins with $3.5 billion in federal funding and the states and territories undertaking expedited zoning, planning and land releases to facilitate new building.
All of this is happening amid a housing crisis that has seen rents and home values both skyrocket by more than 40 percent since August 2020, according to CoreLogic data. Demand for social housing is also high, while post pandemic immigration has put further pressure on the market, and dwelling approvals per capita are at decade-lows amid high interest rates and higher materials and labour costs.
But there’s another way to fix it, says RBA assistant governor Sarah Hunter. We could just go back to living like we did in the 1980s. Back then, households were larger in size. That is, the number of people per household was higher at 2.8 people per home compared to 2.5 now. That may not sound like much of a difference, but Ms Hunter says if we reverted to this we’d need 1.2 million fewer homes right now.
In a speech last week on housing market cycles and fundamentals, Ms Hunter said that underlying demand for housing – be it rental or ownership – is determined by the size of our population, currently 27 million, and the average number of people living in each of our 11 million homes.
Ms Hunter said Australia typically has faster population growth than other advanced countries, driven by net overseas migration. In FY23, new overseas migration totalled more than half a million people. She also said the size of Australian households has been trending lower over the long term, mainly due to demographic factors. These include an ageing population, which means we have more elderly Australians living alone or in couple-only households; as well as a falling birth rate, which is reducing the average family size.
While the demographic trends that drive housing demand tend to occur slowly, the pandemic sped them up. “During the pandemic, there was a shift in preferences towards more physical living space per person ... This was particularly the case for people who shared a home with non-family members, such as young people living in a flat share,” Ms Hunter said. “This group shrank as a proportion of households, while the share living with their partner increased – as a result, the average household size declined.”
She added: “The shift to working from home has also reinforced this change. While some people have returned to their workplace full time, there has been an increase in the proportion of people working from home – for many, a home office space is now highly desirable. This suggests that the recent falls in the average number of people per home will be at least partially permanent.”
When housing demand rises, supply usually responds through new building activity. But the time this takes can vary, depending on rental and housing prices, underlying construction costs and the time required to design, approve and build. In the meantime, property prices and rents adjust in line with the extent of the demand and supply imbalance.
“The pandemic period – and its aftermath – stands out as a particularly sharp cycle,” Ms Hunter said. Growth in demand for new dwellings slowed rapidly in 2020 before rebounding strongly, partly due to the HomeBuilder program. But supply did not respond normally, with completions trending lower over the past five years due to a “perfect storm” of challenges in the construction sector.
They began with COVID-related supply chain disruptions that made it difficult to source materials, fixtures and fittings. Materials and labour costs went up, and a combination of shipping delays and labour shortages significantly extended building timelines. Today, supply chains have normalised but costs remain nearly 40% higher than in 2019 and the pipeline of new builds is clogged.
Additionally, major new projects are typically funded by debt, so higher interest rates are also reducing the viability of new builds. Many developers have delayed projects because of higher costs relative to anticipated returns. Meriton founder Harry Triguboff recently told The Australian that government and council approvals take too long and “it is harder to sell apartments now than ever before” due to high interest rates and fewer Chinese buyers.
Ms Hunter said easing zoning and planning restrictions and streamlining approval processes could reduce costs and lift supply but “it will not be a quick fix”. She concluded: “… upward pressure on rents and prices will remain until new supply comes online”.
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New detached-home sales fell 10% nationally in August, led by a 27% decline in Victoria, raising concerns about construction starts in 2027.
2 min
Australia’s hoped-for recovery in housing construction is losing momentum before it has had time to close the national supply gap.
Sales of new detached homes fell 10 per cent nationally in August, according to the Housing Industry Association’s survey of major volume builders across the five largest mainland states. It was the fourth consecutive monthly decline.
The fall was broad rather than isolated. Victoria recorded the largest retreat, down 27 per cent, followed by Queensland at 20.2 per cent, New South Wales at 17.5 per cent, South Australia at 10.8 per cent and Western Australia at 8.2 per cent.
Across the three months to August, sales were 19.3 per cent below the preceding three-month period and 7.7 per cent lower than the equivalent period a year earlier.
New-home sales matter beyond the immediate fortunes of volume builders. They are an early indicator of future starts: buyers sign contracts, finance is finalised, approvals are secured and construction follows months later. A sustained sales decline during the middle of 2026 is therefore likely to weaken commencements during 2027.
The slowdown reflects the collision of several pressures. Households have absorbed multiple interest-rate rises, reducing borrowing capacity and increasing the repayment cost attached to a new build. Established-home prices have softened in some markets, weakening the relative appeal of waiting through a construction period. Builders continue to face elevated labour and material costs.
The Reserve Bank’s August analysis showed new-dwelling construction prices increased 1.8 per cent during the June quarter and 5.3 per cent over the year. It attributed part of the pressure to oil-derived building products and other conflict-related costs.
Policy uncertainty can also cause buyers and investors to defer large commitments. But the precise contribution of any single tax or regulatory change is difficult to isolate from rates, confidence, land prices and construction costs. The HIA survey should be read as an indicator from large builders rather than a complete count of every dwelling sale.
The figures complicate progress towards the Housing Accord target of 1.2 million homes. The National Housing Supply and Affordability Council reported 308,000 completions since the Accord began and 244,000 dwellings under construction in the March quarter. Approvals and commencements had improved, but falling sales risk undermining the next wave.
For developers and governments, the warning is that planning approvals alone do not create homes. Projects need finance, viable construction pricing and buyers able to settle. If one part fails, approved supply can remain on paper.
Data box
National August new-home sales: Down 10 per cent
Three months to August: Down 19.3 per cent from the preceding three months
Year-on-year three-month comparison: Down 7.7 per cent
Victoria: Down 27 per cent
Queensland: Down 20.2 per cent
New South Wales: Down 17.5 per cent
South Australia: Down 10.8 per cent
Western Australia: Down 8.2 per cent
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