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Australia needs more houses but who’s going to build them?

A number of factors stand in the way of Australia's need to increase housing supply.

Composite image of housing construction, and Australian banknotes.
A shortage of labour and materials is driving up the costs of housing construction. (Source: Getty)

Every competent economist and housing analyst knows the best solution to the high-rent and high-price problems in the Australian housing market is to build more dwellings than will be needed because of population growth.

It is an easy proposition – if supply exceeds demand, prices will generally be weaker.

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The problem with this solution to the housing crisis is that it takes a long time to come to fruition. It takes years for the idea of new dwellings to go from a piece of dirt to getting local government approval for a dwelling, to getting the architects to design a property, then arranging the builders to make it, and finally, for someone to move into it.

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The problem is compounded by an array of other issues - all working against improved affordability in the short to medium term - in particular, the sudden and dramatic rise in population, which is adding to demand for housing many times more quickly than properties can and are being built.

Another issue is just how willing builders and developers will be to undertake construction where there are risks for house price falls, especially where credit is a lot more difficult to secure and where planning rules are uncertain.

And to top it all off is a shortage of labour and materials, the essential ingredients for building homes in good time and with costs reasonably well contained.

This means that even if today private builders wanted to ramp up the construction of dwellings, they are severely constrained from doing so.

The financial maths in many instances simply does not add up.

While these factors are at play, demographics are seeing huge gains in population, which is skewed towards skilled migrants who easily gain employment, usually in well-paying jobs, which feeds into housing demand – rents and prices compounding the pressures in the rental and home-purchasing markets.

The housing problem will clearly persist for many years, with population growth strong and additions to the dwelling stock tepid in comparison.

Indeed, rents are likely to remain high and house prices are rising, even with the higher interest rates being imposed by the Reserve Bank (RBA). This begs the question: if the private sector is not going to build enough houses over the next three to five years, should the government step up to provide affordable housing and, with it, a sufficient supply of dwellings for disadvantaged Australians?

Can the government add to housing supply in time?

For the government, where the issue of finance is largely inconsequential - at least in theory - the issue of ramping up investment in dwelling construction faces many of the same almost-insurmountable problems as those experienced by the private sector.

Even if the government could fast-track land-zoning rules to allow for construction in areas where most people want to live, it would still be facing the same labour shortages and materials costs as the private sector.

If it did fast-track investment in housing, the government would be adding to inflation pressures as the RBA tries to cool growth and inflation with interest rate hikes.

Indeed, it would be competing with the private sector for labour and materials, which would likely result in a less-than-optimal outcome in terms of any overall addition to the number of dwellings, at least in the short term.

What can be done?

When the economy slows and inflation is contained, the government will be better placed to ramp up its investments in public housing, partly because of the need to cushion the effects of any economic downturn, but also because it will add to the supply of dwellings, particularly affordable ones.

This leads to a simple and what seems obvious conclusion that the problems in housing require a focused, dedicated and sustained program where the government sector does drive supply over many years.

The government could cut immigration to lessen the red-hot demand for housing, but that is for another column.

There is no quick fix but a strategy to fix the problem of a housing shortage requires government intervention in a delicate way that works hand in hand with managing the business cycle.

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