Australia’s housing shortage won’t be resolved by the private sector under current policy settings, with the Housing Industry Association (HIA) warning that misaligned government incentives are standing in the way of meaningful supply growth.
HIA chief economist Tim Reardon (pictured) said while Australia is an open and competitive economy, the private sector cannot deliver sufficient housing stock unless government structures and planning systems are overhauled.
“Everyone within the housing supply chain is acting rationally given the incentives they face,” Reardon wrote in a recent HIA commentary. “Governments want the private sector to increase the supply of housing, without making a profit.”
“Until every participant in the supply of homes has incentives that are aligned to build more housing, Australia will fail to deliver an adequate supply of homes and rely increasingly on public housing stock.”
In its recent Stamp Duty Watch report, HIA also warned that Australia can’t meet its 1.2m homes target while taxing capital needed for supply, as surcharges drive away foreign investment and worsen the housing shortfall.
His comments come as the housing market heats up again following recent rate cuts. CBA economists say home prices have already risen 3.1% since the Reserve Bank began easing in February – outpacing their initial forecasts. Despite this, affordability remains “a significant challenge,” especially for first-home buyers.
According to Reardon, one of the largest barriers is the role of local councils in the approvals process, where financial, political, and social disincentives hinder new housing approvals.
“It is not that local councils are bad at their job. In fact, if they were any better at their job, we would have even fewer homes,” he said.
He pointed to the upfront cost burden of infrastructure, local opposition to development, and community expectations around urban design as core challenges that councils face without the proper tools or incentives to support housing growth.
Reardon said the housing industry had already seen success with the privatisation of building certification and argued similar reform was needed for planning approvals to improve efficiency and reduce delays.
“Private building certification has dramatically reduced approval times and costs, without a measurable decline in quality,” he said. “Today, no-one suggests reverting to council-controlled building approvals.”
Reardon argued that town planning had become overly subjective and slow, and that removing assessment tasks from councils would let planners focus on city design while standardising approval benchmarks.
“Let town planners do what they are good at – designing cities – and remove them from the administrative compliance task of approvals,” he said.
Reardon said that high profits among a few large developers are not the result of market failure, but a by-product of government-imposed constraints that limit market participation and reduce competition.
“There are only a few firms capable of navigating the labyrinth of local, state and federal approvals to bring land to market,” he said. “Each time governments tax new development, fewer firms remain, reducing competition, resulting in higher costs, and even more profit for the remaining firms.”
Reardon also criticised recent policy decisions, including Victoria’s new value capture tax, as well-intentioned but ultimately compounding the problem by layering costs without reducing others.
Reardon said the housing crisis stems from government policy failure, not a failure of the market.
“In an open and competitive market, there should not be a shortage of homes. The market should solve this problem,” he said.
Reardon proposed two key reforms:
“Until these changes are made, governments will continue relying on short-term patches to cover up the damage done by decades of misaligned incentives,” Reardon said.
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