Australia’s housing shortage: demand outstripping supply

Australia is currently grappling with a severe housing crisis, caused by a significant imbalance between demand and supply. It is characterised by low rental vacancy, rising homelessness, surging rents and dwelling prices. This is a persistent housing crisis that is unlikely to be resolved in the short-term.

Population growth plays a significant role in driving housing demand in Australia. The country has experienced record high net overseas arrivals in 2023, with federal budget forecasts projecting population growth of 2.18 million over the next five years. This influx of people, including the return of international students and skilled migrants, is creating substantial pressure on the housing market and has caused the demand to exceed the current rate of housing construction.

Despite the growing demand, Australia faces significant challenges in increasing housing supply. The construction industry is grappling with severe shortages of skilled workers, which has slowed down project completions and increased construction times. This shortage has been partly attributed to reduced influx of skilled migrants during the pandemic period, as well as competition for labour from large infrastructure projects. Emerging from the pandemic, supply chains for construction materials were significantly disrupted, coupled with rising inflation leading to shortages and increased material cost prices. This has made large-scale projects riskier and more expensive, deterring many developers from starting new projects.

Higher interest rates have also led to increased borrowing costs for construction companies and developers. This has resulted in many projects becoming financially unviable, leading to delays or cancellations of new housing developments. Higher interests have also led to a significant increase in project insolvencies over the past 12-18 months.

The private sector is struggling to keep pace with demand and is expected to deliver new housing. The government's target of building 1.2 million new homes over five years relies heavily on private development (97% of the target). However, systemic market problems at the front end of housing delivery are supressing supply and driving up prices. The Housing Australia (formerly NHFIC) had previously forecasted a supply gap of 115,600 units by 2027. However, the latest population forecast estimates the deficit to increase to 197,847. 

Figure 1 – Demand and Supply Projections

Source: Housing Australia, JLL Research

The combination of labour shortages, rising construction costs, and industry insolvencies has created a perfect storm, which has severely hampered Australia's housing market increased supply. As a result, housing completions remain well below pre-pandemic levels, despite the urgent need for more housing. This situation is likely to persist in the short to medium term, affecting availability and affordability of housing across the country, albeit potentially at a more moderate pace than recent years.