The Surprising Solution to Australia’s Housing Crisis: Brace for Rising Prices
5 min read
Key takeaways
Counterintuitively, the real solution to Australia’s housing crisis may be rising house prices.
While this sounds politically unpopular, it’s based on sound economics: developers won’t build unless it’s profitable, and current prices don’t support viable returns.
With strong population growth, continued supply shortages, and falling interest rates, today’s prices will seem like a bargain in 10 years.
Have you ever wondered what the real fix for Australia’s housing crisis might look like?
Well, buckle up because it might not be what you expect.
Here’s a bold assertion that’s bound to stir up some debate: the only way to truly resolve our housing crisis is for house prices to rise.
Yes, you heard that right.
At first glance, it sounds counterintuitive, maybe even a little controversial, doesn’t it?
But let’s let me explain why this might just be the remedy we’ve been avoiding.
The heart of the crisis: a supply and viability conundrum
The core issue at the heart of our housing crisis is straightforward yet complex.
It’s not just about insufficient houses to meet demand but about the economic viability of building these much-needed homes.
The fundamental issue is a mismatch between the cost of bringing new supply to the market and the price that new supply currently achieves.
In layman’s terms, it costs too much to build, and the returns just aren’t there for developers.
Most large-scale developers reckon that prices have to rise 15-20% to make taking on the risk of developing new projects viable.
According to industry leaders like Metricon Homes CEO Brad Duggan, Australia is drastically falling short of housing its growing population, with projections missing the mark by around 300,000 homes in the next five years.
Duggan advocates for what he calls a “wartime response” from the government—a dynamic, robust intervention reminiscent of measures typically reserved for national emergencies.
Developers’ dilemma and the pricing paradox
The discussion often circles back to familiar scapegoats like high taxes and bureaucratic red tape.
Developers tell us that if we truly see this as a crisis, we should address it with immediate solutions like cutting through the planning process blockages.
Now, the government can help fix that a little by reducing costs – lowering taxes, speeding up planning, etc.
And while it would help at the margin, it’s probably not going to make a massive difference.
Most developers agree that for projects to be financially viable, property prices need to increase by about 15-20%.
This isn’t just about greed; it’s about sustainability.
If prices continue to stagnate—or worse, fall—then the incentive to build diminishes, further exacerbating the shortage.
A ripple effect beyond new builds
For homebuyers and investors to pay more for new bills means there must be marketwide price adjustments.
New homes aren’t just competing with each other—they’re also up against existing homes, which are often cheaper alternatives due to the lower cost basis.
Of course, most buyers recognise they have to pay a little bit more to buy a new property, but at the moment, the gap between what they can get for their money buying an established property and how much extra they would have to buy a new property is just too big.
If only new homes increase in price, the market becomes segmented and dysfunctional.
The whole ecosystem needs a reset for balance to be restored.
Embracing the inevitable
So, what does this mean for homeowners and potential buyers?
In my mind, there’s just no way around this. Prices have to go up. And they will.
In essence, by allowing house prices to rise, we enable a cycle of reinvestment into building more homes, which is crucial for meeting the needs of our growing population. It’s a tough pill to swallow but think of it as a short-term pain for long-term gain.
We might just find that the path to solving our housing crisis lies in facing up to the unpopular truths we’ve been reluctant to acknowledge.
So, let’s start the conversation and move towards a solution that secures the future of housing in Australia.
A window of opportunity
With property values rising over the next few, there is an opportunity to buy established properties considerably below replacement cost and with significant intrinsic value.
Further, I see the market moving to the next phase of the property cycle over the next year as interest rates continue to fall.
In general, when interest rates decline, the market tends to experience a surge in activity.
More buyers can afford larger loans, and as demand escalates, property prices usually rise’
Buyers who were previously priced out of the market start to re-enter, and those on the sidelines rush to buy before prices climb too high.
This creates a snowball effect that can rapidly drive up property values.
However, here’s the key takeaway: waiting for rates to drop further might mean missing out.
I see the current market offering a window of opportunity for property investors with a long-term focus.
Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom, which occurred two years ago in early 2023.
But if the market hands you an opportunity like this – to get started at the beginning of the next stage of the cycle – why not take advantage of it?
So it is likely that the price you pay for a well-located property today will look very cheap in 10 years.
And even if you’re not ready to buy just now, it may be a good time to get all your ducks in a row and build a Strategic Property Plan to secure your financial future.
Why not click here and organise a time to have a chat with one of our wealth strategists at Metropole to discuss your options?
