Why we’re falling further behind on the 1.2 million housing goal
Housing approvals have fallen to the lowest level since August 2009, cementing expectations that the current housing shortage is likely set to worsen without further action.
Higher financing costs, the surge in material costs, labour shortages and an uptick in insolvencies across the building industry have put a dent in the number of new projects put forward.
While the monthly trend can be volatile, approvals have been trending down since late 2021, and fell 13.3% in the 12 months to January 2024 compared to the year prior, which was already a decade low.
Just 166,401 new dwellings were approved in the 12 months to January, according to seasonally adjusted data released by the Australian Bureau of Statistics (ABS) this month.
Even more alarmingly, dwelling approvals are typically only the best-case scenario for how many homes are going to get built. Completions are contingent on approvals, but the same is not true in reverse – just because a project is approved to be built doesn’t necessarily mean it goes ahead.
The average time between approval and commencement for houses 2022-2023 financial year was just under three months, according to ABS estimates, while the average time for townhouses and apartments is typically longer and more volatile.
Once construction commences, the ABS estimates that it typically takes just over nine months to complete a detached house, with longer times for both townhouses and apartments.
After lagging approvals by property type, estimates reveal that throughout the past two years about 17% of approved projects have not resulted in completions, which is a larger drop off than has been seen throughout the past decade.
The larger than usual drop off reflects in part the slowed pace of building and backlog of approved homes that are yet to be completed, highlighting capacity constraints as well as the higher proportion of projects not making it to completion.
The most recent building activity release from the ABS show new home commencements are at decade lows.
It’s evident that shortages in labour, skills, and costlier building materials along with higher interest rates have weighed on construction activity.
Not only are homes taking longer to build, but the shortage of homes is likely to worsen by even more than indicated by the concerning approvals data.
The good news is governments have recognised the need for increasing the supply of housing.
The federal government has set a target of 1.2 million new homes by 2029 to help ease worsening housing shortages.
The bad news is we’re not building enough to hit that goal. Given the current trajectory, it's unlikely that 1.2 million new homes will be built in the next five years.
We’re currently completing just over 170,000 new homes are completed a year, which is below the prior decade average, and approvals are signalling that’s only going to get worse.
Using the recent estimated attrition between approval and completion, closer to 136,000 homes will be built, unless something changes.
That’s a little over half of the 240,000 homes a year that need to be built to meet the goal of 1.2 million new homes by 2029.
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This means we’re likely to continue to see an undersupply of homes to buy and an undersupply of homes to rent.
Given capacity constraints remain evident in the construction sector, it is hard to imagine the housing industry being able to ramp up capacity to fill that 44% shortfall.
If we’re going to hit that target of 1.2 million homes, something will need to change. Unless we make efforts to ease construction capacity constraints, efforts to boost housing supply will fall short.
Barriers hampering homebuilding need to be addressed, from the approval and planning phase through to completion.
Continued housing supply constraints alongside the increase in population will continue to strain the housing market and affordability.
All this is happening while population growth remains strong, indicating demand pressures are set to remain elevated. Housing supply is already being outstripped by surging population growth.
Based on recent population gains, new residents will likely absorb the 1.2 million homes if average household sizes remain constant, unless population growth is tempered markedly in the coming years.
The latest national, state and territory population data show Australia's population grew by 624,100 people in the year ending 30 June 2023. The latest national accounts data implies growth of about 685,000 people in the year to December 2023, representing growth of 2.6% per annum. The decade average is closer to 1.6%.
Although it’s expected the surge in population growth will begin to ease this year, population growth will remain above the prior decade average.
With renters facing extremely low availability of rentals and buyers facing the worst affordability in at least three decades, it’s clear all signs point to a housing shortage that needs to be further addressed.
Increasing the supply of housing is a one factor in curbing the decline in affordability that poses challenges for so many.
Unless we make efforts to boost housing supply, ease construction capacity constraints and reduce the cost of building new homes, we will continue to see the housing and rental crisis worsen.
Given the current housing shortage and plummeting affordability, we’re not building enough homes to sustain the level required by population growth, let alone meet expanded targets.
This represents a critical juncture for championing and enacting reforms that will bolster homebuilding efforts and boost supply to guarantee that sufficient housing is attainable for every Australian.
By Eleanor Creagh
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