National cabinet is targeting 1.2 million new homes – are we on track?

Angus Moore
Angus Moore

Renters are facing extremely low availability of rentals and buyers are facing the worst affordability in at least three decades.

Sustainably solving both those problems can only be achieved over the long term if we build more homes.

Governments around Australia are recognising that need.

In August, the National Cabinet agreed to build 1.2 million homes over the next five years; more recently the Victorian government’s Housing Statement targeted 800,000 new homes across Victoria over the next decade.

Those are laudable goals; but how are we tracking to hit them?

We’re not building fast enough to hit 1.2 million homes in five years

To build 1.2 million homes over the next five years, we’ll need to build 240,000 every year.

At the moment, we aren’t. Australia completed around 170,000 new homes over the year to March 2023, the most recent period for which we have data. That’s well short of the needed pace.

To meet that 1.2 million goal, we need to increase our pace of building by almost 40% from where it currently stands.

That’s a stiff increase, but it isn’t an impossible target by any means.

In the late 2010s, Australia completed around 200-210,000 homes every year. At peak in early 2017, we’d completed nearly 220,000.

But of course, Australia is bigger than it was six years ago. That peak in 2017 equated to 8.9 new homes per year per 1000 people; at today’s population that equates to about 235,000 home per year, only just shy of the needed pace.

Building homes has been hard in the past few years

Part of why the pace of building has slowed in recent years is that construction has been disrupted, which means homes have taken longer to build. This is true for all types of building.

The impact of this increase is big. The uptick in time to build detached houses, which looks small on the chart, means that the pipeline of detached houses under construction has swelled from around 60,000 pre-pandemic to more than 100,000 today. About two-thirds of that increase can be attributed to longer build times.[1]

While a lot of factors have contributed to this increase, an important factor in the past couple years has been disruptions to supply chains internationally, and the difficulty sourcing raw materials and escalating building costs.

Construction costs surged during the pandemic, driven by big increases in the cost of raw materials. That meant construction costs increased at their fastest rate since the 1980s – with the cost to build a detached house up an eye watering 20% over the year to September 2022.

The good news is things are starting to stabilise.

House construction costs were up 1% between March and June this year; while that’s still faster than what was typical pre-pandemic, it is nowhere near as unusual as we were seeing in 2022.

We’re not approving enough higher-density homes to hit the 1.2 million target

While some of those pandemic-era disruptions are starting to fade, which will help construction, the next couple years still look set to be too slow.

Building approvals for new homes have fallen as interest rates have risen.[2] Across the country we’re not starting the process to build new homes at anything like the rate we saw in the 2010s.

While approvals for detached houses have slowed from what we saw in the late 2010s, the big change is in high-density. We are not approving anywhere near as many apartments and semi-detached homes as we were in late 2010s.

If we’re going to hit that target of 1.2 million homes, that will need to change.

More medium- and high-density development in inner- and middle-ring areas was how we built more in 2017, and if we’re going to hit 1.2 million homes, it will have to be part of the answer.

This approach has worked in cities like Auckland and Minneapolis, both of which made building mid-rise medium-density homes easier. This change heralded a surge in construction, and drove down rents relative to peer cities.

These changes aren’t easy, but unless we focus on what works, housing affordability in Australia will remain challenging.

[1] The remaining third is because we commenced a lot of detached houses during the pandemic on the back of HomeBuilder and low interest rates

[2] Building approvals happen in advance of construction commencing, and so provide a guide as to the outlook for commencements (and thus completions).

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