Australia is addressing its climbing home prices in its national budget as the country grapples with a shortage of homes. Despite the Reserve Bank of Australia’s aggressive monetary tightening efforts, home prices have steadily risen since rebounding from a downturn in 2022. Recent figures by property consultant CoreLogic reveal that home prices increased for the 15th straight month in April, with the median Australian home price now standing at 779,817 Australian dollars ($530,115).

Rents have also surged, rising 7.8% annually according to Australian Bureau of Statistics (ABS) data published last month, marking the biggest jump since March 2009. Notably, rental price growth for flats has outpaced that for houses. “Affordability is currently at the worst levels on record in Australia from a mortgage serviceability perspective,” said Eliza Owen, head of research at CoreLogic Australia. She predicted that home values will continue to rise this year, though less steeply than in 2023.

Treasurer Jim Chalmers is set to deliver the budget on Tuesday, which is expected to focus on addressing the nation’s housing crisis. The Albanese government has announced plans to allocate 88.8 million Australian dollars ($58.7 million) to train 20,000 local workers for the construction and housing sector. Additionally, the government intends to spend AU$1.8 million on streamlining skill assessments for 1,900 potential migrants and prioritize 2,600 for targeted occupations.

The sharp rise in construction costs, coupled with labor and materials shortages, has slowed the delivery of new builds, hampering the supply of new housing. A recent report by PropTrack highlighted these issues. “On the supply side, new housing has been constrained by ongoing capacity constraints – particularly for finishing trades where required skills are easily transferable to non-residential construction – and rapid increases in construction costs,” noted the Reserve Bank of Australia (RBA) during a recent March board meeting.

Developers and housing advocates have called on the Australian government to lift a ban on foreign skilled construction workers using a new fast-track visa stream. Opposition leader Peter Dutton has criticized the Albanese administration for allegedly shutting doors to skilled tradespersons while failing to address migration issues. “There’s an extraordinary mismatch in the supply and demand for housing in Australia at the moment,” said Owen. “Most recently, the contribution to that mismatch comes from record highs in net overseas migration amid a choke-hold on the residential construction sector from increased material cost and tight labor supply.”

The country saw a net gain of 518,000 people in the year ending June 2023, the largest gain since records began, with about 75% of migrants arriving on temporary visas, more than half of which were international students, according to ABS.

The National Housing Supply and Affordability Council (NHSAC) stated that Australia’s limited housing supply has been further stretched by several factors, including “the resumption of migration at pace, rising interest rates, skills shortages, elevated construction company insolvencies, weak consumer confidence, and cost inflation.” These factors have created an environment where prices and rents are growing faster than wages. Rental vacancies are near all-time lows, 169,000 households are on public housing waiting lists, 122,000 people are experiencing homelessness, and projected housing supply is very low.

The Albanese government established the NHSAC in December as part of its efforts to address the housing situation in Australia. Last year, the government announced plans to build 1.2 million new “well-located” homes starting July 1 to tackle the housing crisis. Authorities also allocated AU$500 million to facilitate the development of new housing in “well-suited” locations.

Housing affordability is diminishing as home values and rental rates surge, outpacing the growth of household incomes. While the average full-time annual income in Australia reached AU$98,098, according to ABS, individuals who can buy a home typically earn more than double that, at an average of AU$220,000, marking a nearly 40% increase from AU$160,000 in 2019. “The result is a falling rate of home ownership, more demand pressure on an already tight rental market, and greater reliance on homelessness services for the most vulnerable,” said Owen.

She also highlighted the long-term effects of high housing prices, stating, “We’re seeing real estate as a bigger driver of the wealth divide between wealthier and lower-wealth households because income growth can’t keep up with prices. Higher housing costs for renters and recent mortgage holders also weigh on our productivity and economic capacity because there’s less money left over for personal investment.”

The RBA acknowledged in its May monetary policy decision that “household consumption growth has been particularly weak as high inflation and earlier rises in interest rates have affected real disposable income.” The central bank noted that households are saving and cutting back on discretionary spending. As the government and financial institutions work to address these housing challenges, the effectiveness of these measures will be crucial in determining the future of Australia’s housing market and overall economic stability.

In addition to these efforts, the government is exploring policies to incentivize the construction of affordable housing. Potential measures include tax breaks for developers who build affordable units and grants for first-time homebuyers. These initiatives aim to increase housing supply and make homeownership more attainable for a broader segment of the population. The success of these strategies will depend on effective implementation and collaboration between federal, state, and local governments, as well as the private sector. As Australia navigates these housing challenges, the outcomes will have significant implications for the nation's economic health and social equity.