Three reasons why Albo’s promise to build 1.2 million homes to solve the housing crisis will probably never come true – and prices will continue to rise

Prime Minister Anthony Albanese’s plan for Australia to build 1.2 million homes over five years to alleviate the national housing shortage is considered unfeasible because it has never been done before.

Record high immigration is fueling Australia’s housing crisis, with prices in the capital among the least affordable in the world and rents rising 16 percent in the past year alone.

House prices are rising by double digits in less than a year, despite the Reserve Bank having raised interest rates 12 times since May 2022 – with another rise expected on Tuesday.

The situation is likely to worsen further as the Treasury predicts 1.5 million migrants will move to Australia in the five years to June 2027.

More than 400,000 migrants moved to Australia over the year to August – a level significantly higher than the 315,000 migrant influx forecast in the May 2023-2024 budget.

Rather than reducing immigration to more manageable levels, Albanese in August announced a plan for Australia to build 1.2 million “new, well-located homes” over five years, starting on July 1, 2024.

The target was set by the National Cabinet, made up mainly of Labor Prime Ministers, which put pressure on states to change planning laws that give local councils the power to halt high-rise apartment development at the insistence of existing homeowners.

1. Never did

Nerida Conisbee, chief economist at the Ray White Group, said the plan to build 1.2 million homes by mid-2029 is unlikely to materialize.

“We have never built so many houses in a five-year period and unfortunately we are already off to a bad start,” she said.

Australia came closest over a five-year period, building 1.05 million homes between 2015 and 2020.”

This period coincided with the cracking of apartment towers as private certifiers approved projects that were later found to have structural deficiencies.

2. Chinese capital evaporates

Ms Conisbee noted that Chinese capital was in abundance the last time Australia built more than a million homes in five years, with foreign buyers snapping up high-rise apartments near central business districts.

“This was a period when we saw the largest ever influx of Chinese capital and thousands of apartments were built in our CBDs and close to universities,” she said.

“China’s capital has largely evaporated and there is nothing as important to replace it.”

The Covid lockdowns changed that, with the number of completed homes falling from 57,167 in the September quarter of 2018, at the height of the construction boom, to just 41,669 in the June quarter of 2023.

That’s a decline of 27 percent in five years, according to construction activity data from the Australian Bureau of Statistics.

Unit approvals have also fallen sharply, from 23,137 in March 2021 to 13,144 in September 2023 – a drop of 43 percent in just over two years.

3. High construction costs

Builders are struggling with higher costs for materials, with CoreLogic’s Cordell Construction Cost Index showing an 8.4 percent increase in component prices over the last financial year.

But in 2022 the increase was even more serious: 11.9 percent – ​​the strongest increase since the introduction of the goods and services tax in 2000.

Ms Conisbee said the rise in construction costs has since subsided somewhat, but the fact that unemployment remains low at 3.6 per cent means labor costs are likely to remain high.

“A second challenge is the high construction costs,” she said.

“Although the increase in prices has subsided as the cost of construction materials falls, it will take some time before the labor shortage is alleviated.

‘Unemployment is still very low and sectors such as construction are experiencing some of the largest shortages.

‘There are also too few construction companies, and this will also take time to solve.’

The higher construction costs are leading to a wave of bankruptcies among construction companies as they cannot complete contracts at contractually agreed prices.

Data from the Australian Securities and Investments Commission shows that 721 companies failed in September 2023, more than double the number of 314 in September 2021.

Economic implications

The housing shortage is making life harder for renters as Reserve Bank interest rates rise in just over a year, putting pressure on the finances of people with mortgages.

Rents for houses and apartments in the capital rose 16 percent in the year to October, data from SQM Research showed.

Sydney, the recipient of much of the overseas migration, saw its average house price rise 10 percent to $1.397 million in the year to October.

The CoreLogic data also showed a 12.1 percent increase since January, highlighting how the market bottomed out early this year and has since turbocharged, rising for nine months in a row.