Why living 80s style would mean we'd need 1.2 million fewer homes

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”.

Australia’s housing crisis will not be solved by first-home buyer incentives or tax changes alone, with leading property figures warning governments must tackle supply constraints if affordability is to improve.

Speaking at the Kanebridge Quarterly Property Leadership Summit in Sydney last week, expert project marketing specialist Sam Elbanna, property investor and fund manager Paul Miron and property consultant Karla McNeice said that a lack of housing supply remained the central issue facing the market.

Elbanna, Director of CPM Realty with more than 30 years’ experience in project sales, argued that successive governments had focused too heavily on stimulating demand rather than addressing the barriers preventing new housing from being delivered.

“The misconception is that politicians think the way to solve the housing crisis is to drive demand,” he said.

“The reality is that’s not the way. This is a supply-side problem, and it needs to be solved on the supply side.”

Drawing on his experience in project sales, Elbanna said policies designed to help first-home buyers often had unintended consequences, pointing to previous grants that ultimately flowed through to higher property prices.

Instead, he said developers were facing increasing red tape, approval delays and rising costs, which were discouraging new housing supply.

“In the absence of stock, demand exceeds supply,” he said.

Miron, a Co-Founder and Fund Manager of Msquared Capital, said the housing debate had become overly focused on tax policy while overlooking broader structural issues.

He argued that affordability challenges stemmed from a combination of factors, including planning constraints, supply shortages, migration levels and interest rates.

“No-one can be 100 per cent certain on the real reason for property prices is going up,” he said.

“The reason why property prices are higher is a combination of interest rates, lack of supply, migration, vacancy rates and maybe taxes play a role.”

Miron was critical of recent federal housing policy changes, warning they could reduce the number of new homes being built and further constrain supply that was even highlighted in the budget.

He also highlighted the importance of the property sector to the broader economy, noting that residential real estate and related industries employed more than one million Australians.

McNeice, who advises developers on sales strategy and market intelligence, said understanding buyers had become increasingly important as affordability pressures intensified.

While affordability remained a major consideration, she said today’s buyers were focused on value rather than simply price.

“People are looking for value for money,” she said.

She said buyers were increasingly evaluating factors such as transport connections, walkability, nearby amenities and flexible living spaces that could accommodate changing family needs.

“What infrastructure is going on? Can I walk to the shops? Can I meet people at the local cafe?” she said.

The panel also discussed the mounting pressures facing developers, with Elbanna arguing that many projects become financially unviable from the moment a site is purchased.

“The viability of a development happens at the moment the site is bought,” he said.

He said rising construction costs, higher interest rates and overly optimistic feasibility assumptions had left some developers exposed as market conditions changed.

While acknowledging the growing number of smaller and first-time developers entering the market, Elbanna said property development required expertise across finance, construction, marketing and legal disciplines.

“It is actually a business that requires a level of expertise,” he said.

Looking ahead, the panel agreed opportunities remained in the market despite current challenges.

Miron said property should continue to be viewed as a long-term investment and cautioned against trying to time short-term market movements.

McNeice said success would increasingly depend on identifying projects that genuinely met changing buyer expectations.

Elbanna said affordable housing remained achievable, but developers needed to deliver more than just homes.

“We can provide affordable housing in this country,” he said.

“But we’ve got to wrap that affordable housing with the things that people want.”

As Australia’s housing affordability debate intensifies, the panellists agreed on one point: without a meaningful increase in housing supply, demand-side measures alone are unlikely to solve the nation’s property challenges.

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

Australia’s housing affordability crisis is being fuelled by chronic undersupply, planning delays and rising development costs, as politicians continue to focus on the wrong solutions.