Australia’s Housing Market Forecast: Trends and Challenges
Overview of the Current Situation
Australia is facing a significant housing crisis that is expected to drive price growth through 2026, according to new forecasts from KPMG. Despite uncertainties surrounding interest rates, demand for housing is anticipated to surge, particularly at the affordable end of the market. This demand is expected to complicate scenarios for potential buyers as mortgage rates fluctuate, influencing buyer sentiment and overall market stability.
Price Predictions and Market Dynamics
KPMG predicts that national house prices will increase by 7.7% this year, with all major capital cities experiencing some level of growth. Historically, the housing market has shown resilience, but the recent projections reflect a surprise uptick in demand that contradicts earlier expectations of a buyer retreat due to affordability concerns. Specifically, significant price gains have been observed in cities like Brisbane and Perth, which are experiencing a higher concentration of price increases during the latter half of the year. In particular, approximately 66% of annual price growth in these cities was recorded in the second half of the year, with similar trends noted in Hobart and Canberra.
Factors Driving Price Increases
KPMG’s chief economist, Dr. Brendan Rynne, highlights that the recent acceleration in housing demand was largely unforeseen. Increased government support, particularly through a five per cent deposit scheme, has contributed to heightened activity in the lower-end market segments. This increased support has intensified competition in already tight housing supply areas, leading to rising prices despite interest rate hikes and broader affordability challenges.
As Dr. Rynne explains, Australia’s housing woes are structural rather than cyclical, rooted in decades of underbuilding, with a notable shortage in the apartment sector. The effects of the COVID-19 pandemic have exacerbated these conditions, creating an atmosphere of consistently high construction costs and labor shortages that impede the ability to meet rising demand.
Construction Costs and Labor Shortages
Research indicates that while supply chains have stabilized post-pandemic, construction costs have reached a new, elevated baseline, making several housing projects financially unviable. Labour shortages are an ongoing challenge, exacerbated by competition from major infrastructure projects that are siphoning qualified tradespeople away from housing development.
Dr. Rynne stresses that this imbalance in housing supply is not a recently developed crisis but rather a long-standing issue that has compounded over decades. Without qualified labor, it becomes increasingly difficult to construct new homes to match population growth and market demand.
Investor Behavior and Lifestyle Influence
According to mortgage broker Rhys Elmi, there is a noticeable shift in investor behavior, with an increasing number of investors targeting coastal and lifestyle markets. As remote work continues to reshape demand dynamics, many buyers now desire properties that allow them the flexibility of combining leisure and work. This shift is reflected in ongoing demand for holiday homes and other lifestyle properties, further bolstering the housing market.
However, rising interest rates are creating a psychological impact on buyers, inducing hesitation and creating scenarios of market stagnation. Industry groups warn that taxation policies and government-induced costs are constraining housing supply. The Housing Industry Association has advocated for stabilizing policies around negative gearing and capital gains tax as a means to encourage investor participation, thereby stimulating new housing construction.
Taxation Concerns and Their Impact
The housing sector in Australia is heavily taxed, with charges incurred at all stages of the housing lifecycle. HIA chief economist Tim Reardon has pointed out that taxes applied to foreign banks and institutions that build apartment complexes have deterred much-needed investment and development. Despite limited revenue generation from these taxes, they have substantially slowed down the progression of new housing projects.
Moreover, cascading fees and infrastructure-related costs have substantially driven up land prices, contributing to the overarching affordability crisis. As a result, projects that could have previously been viable are now considered marginal; HIA estimates suggest that around $570,000 in taxes, fees, and charges are embedded in the cost of a typical new home.
Without addressing these supply-side challenges and fiscal policies, it is likely that rental pressures will remain high prevailing over wage growth, prolonging the affordability crises that plague tenants.
Future Projections and Recommendations
KPMG’s forecasts predict that housing price growth will remain uneven across different capital cities, with Western Australia’s capital Perth expected to produce the highest gains at 12.8%. Meanwhile, rising rents are projected to continue above long-term averages, reinforcing the urgency for robust reforms in housing policy and construction practices.
As the country continues to grapple with these challenges, a collaborative approach between government and the housing sector is crucial to closing the gap between housing supply and demand. Achieving a minimum rental vacancy rate of 3% would be ideal, but procuring this will depend on alleviating the upfront tax burdens imposed on new housing projects.
In conclusion, without addressing the foundational structural issues in the housing market, it seems that Australia will continue experiencing high prices and significant affordability challenges ahead, creating a precarious environment for renters and prospective buyers alike.
