Why the Australian housing market is worse than our overseas peers

Australia’s housing supply is lagging behind other OECD countries, recent data shows, but building more homes will only fix part of the problem, experts say.

Encouraging better use of existing housing stock and curbing the demand for investment properties are also important measures to bring house prices down – along with increasing supply to keep up with population growth.

Australia ranked 22 out of 33 OECD countries when it came to providing housing, the recent federal budget said, warning the undersupply was a key factor driving increases in rents, mortgage repayments and house prices.

While Australia’s housing supply increased from 403 dwellings per 1000 people in 2011 to 420 per 1000 people by 2022, the country failed to keep pace with international peers and the OECD average, the federal budget paper noted.

However, demographics also needed to be considered when comparing Australia’s housing supply with that of other countries, Curtin University economics professor Rachel Ong ViforJ said.

She said the data showed Australia had an average of 2.5 people per dwelling. The number one country for supply – Italy – had around 600 dwellings per 1000 people, but that only equated to 1.7 people per household.

“Australia is a relatively young nation compared to Italy,” Ong ViforJ said. “Therefore, we would have larger households with young children – more people in each dwelling, and our dwellings are of course quite large, so we can house more people under each roof.”

She said while there was definitely an acute need for more new homes to “catch up with new demand”, as well as more investment in social housing, other measures to improve the use of established homes should be considered.

“New housing supply only adds to the existing housing stock a bit at a time, so it will take a long time for new housing supply to have any positive impact on affordability. The majority of our housing stock is made up of established dwellings,” she said.

“So while we can concern ourselves with building new houses, we should at the same time try to see how we can make better use of our established dwelling stock … providing greater incentives for ‘empty nesters’ to downsize if they have spare bedrooms, [and] dealing with the negative impacts of short-term rentals, [for example] Airbnb, on the supply of long-term rental stock.

“Of course, the usual supply-side solutions apply – unblocking capacity constraints in the sector, government building more social housing for low-income households, reforming the planning to better support delivery of a mix of new builds.”

Economist Saul Eslake said while Australia’s demographic make-up did differ from many of the countries in the OECD, it was similar to Canada, yet they had increased their housing supply at a greater rate between 2011 and 2022.

“Canada is having bigger problems with the rate of migration than we are,” Eslake said. “It’s helpful to compare with others as one way of working out how we’re doing and to ask, ‘Could we be doing any better?’”

HSBC chief economist Paul Bloxham said while it was clear from high rents and rising house prices that housing was in short supply, Australians’ desire for larger, detached houses was the more likely reason for our comparatively low number of dwellings per person than in other countries.

“For any given amount of demand for the housing in those [major Australian] cities, we’ve got less supply of well-positioned housing because we have a preference for having detached dwellings laid out in suburbs rather than having lots of apartment buildings,” he said.

“By virtue of that choice, we do make house prices structurally higher, relative to incomes. If we were building more apartment buildings … that would help to offset that and make more affordable housing near our major cities.”

Eslake said it was only fair that young Australians still hoped to one day afford a relatively large home close to a city centre.

“You can’t blame today’s twenty and 30-somethings for wanting what their parents had.

“That said, younger people are more willing to live in apartments and compromise on an extra bathroom or a dining room … they are less willing to compromise on location.”

Tax reforms could encourage more retirees to downsize, freeing up established homes for younger people and families, said Eslake.

“Stamp duty is a huge obstacle for people who might consider downsizing.”