The Australian Government's ambitious National Housing Accord target of building 1.2 million new homes by 2029 made for great headlines when announced. But for those of us keeping a close eye on the property market, the early numbers tell a different story. With first-year building approvals falling 32% short of what's needed, it's time to confront a challenging reality: Australia is unlikely to meet these lofty goals.

For property investors, this supply shortfall signals both challenges and opportunities. Let's explore why these targets will likely remain out of reach and what that means for your investment strategy moving forward.

The Widening Gap Between Targets and Reality

The numbers paint a stark picture. To meet the 1.2 million home target over five years, Australia needs approximately 240,000 new dwelling approvals annually. Yet 2024 delivered just 162,071 approvals nationwide – a massive 32% shortfall from the year's target.

This gap isn't distributed evenly across the country. The Australian Capital Territory stands alone as the only jurisdiction tracking close to its targets. Meanwhile, Sydney – where housing pressure is most acute – saw a concerning 45% shortfall. Darwin fared even worse with a staggering 79% gap between needed and actual approvals.

What's particularly troubling is that at the local level, about 85% of regions across Australia failed to hit their first-year targets. This isn't a problem isolated to a few underperforming areas – it's a nationwide shortfall with few bright spots.

Even with recent modest improvements, the National Housing Supply and Affordability Council now projects that only 1,040,000 new dwellings will be added by 2029 after accounting for demolitions. This falls well short of the 1.2 million target before we even reach the halfway mark of the program.

Three Critical Barriers Standing in Our Way

Why is Australia struggling so significantly to meet these housing targets? Three fundamental constraints are creating a perfect storm in the construction sector.

The Cost Crisis

Construction costs have skyrocketed, rising approximately 40% above pre-2020 levels – outpacing general inflation by more than 20%. This isn't a temporary spike; it's a structural shift in the economics of building.

While timber and steel price growth has moderated, other essential materials like clay bricks, concrete, cement, and electrical appliances continue trending upward. The December 2024 figures showed building materials for house construction still rising by 1.6%.

Labour expenses compound this problem. Construction wages rose 3.5% in the year to December 2024, exceeding the private sector average. Despite slight easing from 2023 peaks, skilled trade vacancies remain 75-125% higher than five years ago, with critical shortages in bricklaying, roofing, carpentry, and tiling.

These combined cost pressures have fundamentally changed the feasibility equation for developers. Many projects that would have been profitable pre-pandemic simply don't make financial sense today.

The Land Supply Squeeze

You can't build houses without land, and Australia's pipeline of development-ready land is drying up. The release of residential greenfield lots dropped 26% nationwide in 2023 to just 36,500 – a 33% drop from the 10-year average.

This scarcity has predictably driven up land prices. The average capital city land price now exceeds $1,000 per square meter, with Sydney topping the charts at $1,505/m². For developers already facing thin margins due to construction costs, these land prices further erode project viability.

Local councils and planning authorities, often under-resourced and facing community resistance to increased density, create additional bottlenecks in the approval process. Even when financing is available, getting projects through planning can take years rather than months.

Industry Financial Distress

The construction sector is facing unprecedented financial pressure. In a normal market cycle, rising home prices would stimulate supply by increasing developer profits. But today's market is anything but normal.

Fixed-price contracts signed during periods of rapid inflation have left many builders caught between rising input costs and locked-in sale prices. The share of builders operating with negative cash flow has climbed to 30% – well above the usual 20% and the highest level in over a decade.

The result has been a wave of insolvencies across the construction sector. While rates are beginning to normalise, significant damage has already been done. Many skilled builders have exited the industry altogether or pivoted to premium niche markets where margins remain viable.

Each of these factors alone would challenge the housing supply pipeline. Combined, they create a formidable barrier to achieving the government's ambitious targets.

What This Means for Property Investors

For property investors, this persistent supply-demand imbalance creates a market environment likely to support continued price growth in most regions, particularly those with strong population growth and severe supply constraints.

The projected undersupply means that even with interest rate pressures and affordability challenges, the fundamental shortage of housing will continue to provide a floor for property values. For existing property owners, this represents a buffer against significant price corrections in most markets.

Rental yields will likely remain strong and potentially strengthen further as the shortage of rental properties persists. Areas with the most severe supply constraints relative to population growth – like Sydney and southeast Queensland – may see the strongest rental growth.

However, this outlook isn't uniform across all markets. Areas that saw significant apartment construction during the previous building boom (2014-2019) like Melbourne's CBD, Docklands, Southbank, and parts of Sydney like Parramatta have demonstrated that sufficient supply can indeed moderate price growth. Melbourne's broader market has shown better affordability outcomes partly due to historically stronger supply responses.

If you're considering investing in development projects, proceed with caution. The financial pressures outlined above have made development significantly riskier. Projects with planning approval already secured and realistic cost projections that account for current material and labour expenses will be better positioned to succeed.

Interestingly, the government's focus on social and affordable housing, while socially valuable, is subject to the same construction capacity constraints. This means even government-backed initiatives will struggle to significantly boost overall supply in the near term.

The build-to-rent sector offers potential hope for increased rental supply, but progress has been stalled by political disagreements over tax frameworks and affordability requirements. Watch this space for potential policy breakthroughs that could unlock institutional investment in this sector.

Strategic Considerations for Investors

Given these realities, what approach should property investors take?

First, don't count on government supply targets to materially change market fundamentals in the medium term. The factors constraining supply are structural and will take years, not months, to resolve.

Second, consider the specific supply dynamics of individual markets rather than relying on national trends. Areas like Surfers Paradise, Broadbeach, Caloundra, Geelong, Maitland, and Hervey Bay have demonstrated better-than-average supply responses and may offer different risk-return profiles than severely constrained markets.

Third, be wary of areas where high construction costs make new developments unviable at current price points. Without new supply, these areas may see stronger price growth for existing properties, but development sites may underperform.

Finally, recognise that the current environment favours patience and disciplined investing rather than speculation on rapid supply increases or policy fixes. The structural nature of Australia's housing shortage means that well-located, quality properties are likely to remain in high demand regardless of interest rate fluctuations or short-term market sentiment.

Looking Ahead

Australia's housing supply challenges won't be solved overnight. The 1.2 million home target, while laudable as an aspiration, appears increasingly unrealistic given the fundamental constraints facing the construction industry.

For property investors, this persistent undersupply creates a market environment likely to support asset values despite other economic headwinds. However, it also underscores the importance of careful market selection and realistic expectations about future supply growth.

The housing market may not deliver the volume of new homes the government hopes for, but for strategic investors who understand these dynamics, it continues to offer opportunities for those who can navigate its complexities.

Embark on your property investment journey with Ally Property Group, your trusted ally in Australia's real estate market. Our expert advisers are dedicated to crafting personalised investment strategies for Australian expats and residents alike, aiming to enhance your portfolio and maximise returns. Start building your wealth with Ally Property Group, where strategic insights, analysis and modelling leads to prosperous investments.

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General Information Warning: The information contained herein is of a general nature only and does not constitute in any way, personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional property investment advice specific to your circumstances.