November 2025
“The houses we live in, the places we call home and bring up our families in, have been turned into speculative investment assets by the fifty years of government policy failure, financialisation and greed that resulted in twenty-five years of exploding house prices. The doubling of prices as a proportion of both average income and GDP per capita has turned a house from somewhere to live while you get on with the rest of your life into the main thing, and for many people a terrible burden.
The problem of housing affordability now dominates the national consciousness and has affected the lives of everyone, dividing Australia into those who own a house and those who don’t; those whose families have housing wealth to pass on and those who don’t. And what’s more, most people now believe that the way to build wealth is to buy a house, and then another one, and another one after that, or to keep upgrading the one you live in. Or both.”
– Alan Kohler, Journalist and Author of The Great Divide: Australia’s Housing Mess and How to Fix It
“Anybody who owns a house is very happy that the value of that house has gone up, let’s be quite straight about that. I haven’t found anybody in seven and a half years shake their fist at me and say Howard I’m angry with you for letting the value of my house increase. So it is not a problem if you own a house, it is true that to get into the market in the first place it is harder if the prices continue going up.
But, of course, the interest rates now are much lower than they were seven and a half years ago, about $430 a month on average around Australia – that’s on average around Australia lower than what they were seven and a half years ago. And one of the reasons why housing prices have gone up is that people can afford to borrow more because interest rates are lower. In a sense, we are the victims of our own success and our own prosperity.”
– John Howard, Prime Minister of Australia
It’s well documented by now in Australia that we’re in a housing crisis. What does that mean exactly? It means when the dual metrics of how much it costs to rent the average house and also how much it costs to service the loan to buy the average house both cross 1/3rd of the average household income, which is the threshold for housing stress. That is the economics definition for when we are in and not in a housing crisis.
These are of course averages which are skewed upwards by large property values so I suspect the real numbers are even worse than what is popularly known. Why is there a housing crisis? Well, because houses are too expensive to both rent and live in relative to incomes. This is a very bad problem for a society to have. We want people to be able to live comfortably and happily and spend their disposable income on things other than housing, which is good for the economy. Because from first principles as a species, you can’t flourish in any aspect of your life if you don’t have predictable shelter.
The first thing to probably recognise is that this isn’t an Australian only problem, it’s a global phenomenon. A lot of the media seems to talk about Australian housing in isolation but housing is becoming expensive the world over. In fact if you measure the most expensive Australian cities to their international peers, comparing Sydney to New York or Melbourne to London for example, you might even conclude that Australian housing is relatively cheap by international standards.
So why is housing expensive? Well the components of a house are getting expensive. I’ve written before here on how to understand the value of what a house is worth. It is the value of land + the cost of labour and materials + cost of borrowing capital + developer margin. Adding that together, that’s what a house is worth and largely those things aren’t something you can change.
If we unpack all those components, we can see that they’re at their all time highs right now. Working backwards, a developer margin is pretty much fixed in time and doesn’t change so let’s ignore that. Interest rates are at the highest they’ve been in almost 2 decades so the cost of capital right now is at its highest in 2 decades.
Similarly we are in a period of some of the highest inflation in 2 decades which means both the cost of land and the cost of labour and materials are inflating at the fastest rate in 2 decades. Taken together, every aspect of the components of what prices a house are at some of their highest points in decades and are why house costs are spiralling upwards and there isn’t really anything anyone can do about it.
What happened with materials inflation is for a long period of time it was flat. Then all of a sudden it was escalating at 10%+ per year, every year for half a decade with no end in sight. What that effectively did for the cost of construction was basically double it. Because a brick costs what a brick costs. A carpenter costs what a carpenter costs. Land costs what land costs. You can’t put downward pressure on those items but those are the biggest items for a house.
You could just build a lot of houses which would increase the supply of houses and therefore put downward pressure on the price of houses itself, but what that will incidentally do is increase the demand for the individual components of a house, since there is more construction happening, and increase their inflation further.
But you have to push through that barrier and build more anyway to create more houses if you want to reduce the price of houses. That’s the only way to keep the individual cost of an individual house low and affordable even if you are inflating the value of the category of houses. A rising tide lifts all boats but each boat might be out at different levels of the tide.
A great example of this is Singapore which has simultaneously some of the most expensive housing in the world and also some of the most affordable housing in the world, with enough houses built for every single citizen to afford. They are the best model for understanding how to fix a housing crisis. You just have to grow and build your way out of one by building as many houses as you can at every level of affordability.
A lot of people instead think you can reduce the demand side and if you reduce the demand enough that will also reduce the cost of housing. This is correct theoretically but in practice it is wrong. Because the demand for housing is people. What this argument is saying is if you have less people, then there’s less people to compete for the same house thereby lowering it’s cost. It shows up in calls for a reduction in immigration or lower birth rates or for evenly distributed rural cities.
I think this is putting the cart before the horse. People built houses because they needed somewhere to live, houses didn’t make people to have someone living in them. The point isn’t to fix the cost of housing, the point is to have enough affordable houses for all the people to live in. More people wanting to live in your country than you have houses is why you build houses in the first place going all the way back to the dawn of civilisation in a country.
In fact one of the problems the world over is declining population because it reduces the demand in an economy. You only need to look at places like Japan to see the effects of low immigration. More adult diapers are sold in Japan than baby diapers and all the associated problems in their society that emerge as second and third order problems of that fact. When you have more old people than young people, your country goes into decline because you have more people that need taking care of than you have workers to take care of them.
But Australia is one of the few places in the world with an abundance of immigration and it is great for our economy to have more people, especially young people. So to fix a housing crisis, you don’t want to be shooting your immigration golden goose, you just want to house them properly. Which means building as many houses as you can to increase the housing supply. So we know we need to increase the supply of houses and build our way out of a housing crisis, we’re just not sure how.
In Australia I think we’ve done two really big things wrong that unintuitively have created large bottlenecks in our ability and capacity to build more houses that nobody really discusses or thinks about. The first comes to the speed of development and the second comes to the funding of new homes. This essay is exploring both of those.
Speed of Development – The Permit Process
Here’s something people don’t understand about the Australian construction sector. Australia is excellent at building houses. We invented the Kangaroo crane which unlocked high rise construction the world over. We build some of the largest homes in the world and at the fastest rate in the world. We have some of the most innovative and largest construction companies in the world.
Let’s take a comparison between Sydney and New York to illustrate something. In suburban New York it takes on average 18 months to build a home, in Sydney that is 12 months. So we are building the homes about 50% faster in Sydney than New York, that speaks to speed. In Sydney there are 300 active cranes in any given year but in New York there are only 10 active cranes in any given year. Since a crane is required for building apartments, you could infer we are therefore building at 30X the rate in Sydney than in New York, that speaks to magnitude. We are building both faster and more.
So where are we falling down? It’s in the permit process. In construction you can’t start building without a building permit. Here is a fact that will astound you and I recommend reading twice. In New York it takes on average 2 months to obtain a building permit. In Sydney it takes on average 2 years to obtain a building permit. 2 months vs 2 years is a pretty extraordinary difference. I think we have found our bottleneck.
So from a standing start if you include the permit process, if you want to build a house in New York and Sydney. The New York house will take you 2 months to get the permit and 18 months to construct, for 20 months total. The Sydney house will take you 2 years to get the permit and then 12 months to construct for 3 years total. The New York house will be finished almost a year and a half earlier than the Sydney house even though the Sydney house will be built 50% faster once they start.
I’ve lived this process, I’ve filed for permits on projects of mine in 2023 only to finally get the permits in 2025. I have to pay the interest in that time, which adds onto the cost of that home when I go to sell it, making it more expensive. Who approves building permits and are responsible for this delay? It’s town planners.
The ABC did an expose into the productivity of town planners in Australia, these are the people who work for the local councils that approve new building permits for new housing developments. The ABC found that they are some of the least productive in the entire world. They are single handedly holding back the entire construction sector. We know from first principles that Australian construction companies can build to a higher quality and faster than their international peers when granted a permit. But they can’t start without a permit.
Why are councils so slow at approving permits? There’s 2 explanations, 1 is sinister 1 is generous. Let’s explore both.
The potential sinister explanation is that local councils are made up of local residents who win elections to join the council. These residents live in an area and own property in that area. If they can block new housing in areas they own, reducing supply of new houses, then the value of their own homes increase. Sometimes by a lot, in the realm of millions of dollars in the most highly sought after councils. There is plenty of evidence showing local councils explicitly holding back and delaying land upzoning to prevent new developments in areas they live in. There’s even an acronym for this, NIMBY, Not in My Backyard.
What people maybe don’t appreciate is that NIMBY’s run local councils which are in charge of approving new houses. Where a persons incentive lies, so too does their behaviour as they say. Don’t put people in power to approve new housing where they will make millions of dollars by rejecting new housing. This says to me that the whole council system is badly designed and too qualitative and the wrong people are in charge of it. So the sinister explanation definitely exists and is in the mix when we’re looking for answers.
A cynic might ask is it any wonder then that the millionaires of Brighton start protesting, using their millions from their housing equity, to fight the state government from taking planning controls away from the Brighton councils, which is run by the local residents, when they make their millions in housing by stopping developments in Brighton? In the battle between capital and the state, at least when it comes to housing, the capital is winning.
Most people just don’t understand how this works in practice because the building permit and planning system is a complex legal framework. Because the local councils hide behind seemingly positive phrases like “Neighbourhood character”, “High amenity local planning context”, “Heritage and environmental overlay”, laymens don’t understand what’s happening. But these are all code for rejecting projects because of qualitative reasons that boil down to the town planners said no because they can.
A nuanced view here I like is that town planners are not actually architects, they’re not design professionals they’re bureaucrats who are checking boxes so they go beyond their scope when they comment on the design of a house. Or try to change the design of a house to adhere to loose interpretations, that they basically come up with, of a planning code. Or rejecting a house because they don’t like its design.
The generous interpretation might be that the local construction codes that the local planners have to check against have become so long and so onerous, making the town planners jobs so difficult, that it’s almost impossible to approve new housing quickly. That local councils planning departments are overworked and understaffed and that housing codes have increased a lot, that increase was to maintain housing quality and consistency. Maybe town planners all need superpowered AI’s to help them? I’m not sure what the solution to increase town planner productivity but I’m sure there is one. It just hasn’t been implemented yet.
Availability of Finance – The Loan Process
To do almost anything with a house requires a loan from a bank. Within the housing sector, we have one truly awful product. The home loan. I’ll try and explain why it’s bad and how to fix it.
In Australia for most of the history of the Australian banking sector, we used asset backed security. A bank was lending based on a percentage of the equity within a home. The bank was in the business of lending and it was trying to lend people as much money as they were willing to take out. If you ask people around in the 90s in Australia, they’d even say that often a bank was trying to lend them more money than they even wanted. Frequently they’d borrow less than what they were offered to buy a smaller house that they could afford.
This was a playbook used by a lot of banks but it led to a global financial crisis in 2008 where in extreme cases like America money was being lent to people without jobs, so they had no hope of paying it back. Australians by comparison were very good at paying back their home loans. But in the interest of fixing something that wasn’t broken. In 2009, as a reaction to the global financial crisis, the Australian regulator APRA introduced a suite of policies known as Responsible Lending to introduce additional safety into the Australian banking system to preemptively reduce risk.
What this did was introduce a serviceability benchmark of 3% higher than the interest rate offered to the customer. What this means is whatever the interest rate is, say 5%, the bank adds 3% to it to see if the borrower can meet their payments at 8%, even though they are only borrowing at 5%. This ensures the bank is only lending to people who can easily pay off the loan. But what it accidentally does it set the hurdle way too high for borrowers.
If the interest rate is 3% and you add a 3% serviceability buffer, you have doubled the income needed from that borrower to even qualify to get the loan. So if someone could borrow with a $100k per year income, under the new Responsible Lending serviceability rules, they would now need an income of $200k per year. But here’s the real salt in the wound, it doesn’t assess the buffer just right now but over the entire 30 year home loan.
What this does in practice is nearly halve the borrowing power of most people, especially lower income earners. This kneecapped the entire bottom segment of borrowers ability to borrow any money and therefore harm their ability to enter the housing market at all. Because it was harder to enter, they would need higher incomes and more savings which would take longer, delaying their house purchase by years. That’s years of growth that they missed out on. They can’t even take advantage of lower interest rates for higher borrowings as effectively, the way John Howard hoped.
Can you see who this serviceability buffer rewards? High income earners. Because they’re being assessed against a higher interest rate that they’re not actually paying, it close to doubles their borrowing power. If you can afford an 8% interest rate but you’re only paying a 5% interest rate. This type of borrower could then buy a house years earlier, let it grow in value, turn around and borrow again and buy another house. Low income people had to borrow later, high income people could borrow earlier.
So what this policy did was unfairly harm the very segment of the market that needed the help to enter it and make them less competitive. It reduced their ability to borrow to compete against the high income earners. The low income segment, which includes the first home buyers buys less often and so receives less growth. What it created effectively was 2 types of lending in Australia. 1 for rich people and 1 for everyone else. It used to be they were all borrowing on the same terms in an irresponsible lending market but it was at least an even playing field credit wise. Now it isn’t.
If you take away an average income earners ability to access credit and compete with the high income earner, it allows the high income earner to outcompete everyone else and from 2009 onwards you see a rapid real wealth inequality divergence in Australian wealth emerge which is 90% tied to housing. This is why it feels today like the housing market is just rich people competing with other rich people. Because to some degree it is.
It also means the demand from the types of housing that the lower income people were buying, with the credit they had access to, provided the purchasing demand for the construction companies producing that type of housing product. When those people lost access to the credit or could borrow much less, the demand for those houses dried up so developers stopped making them. Reducing the amount and type of houses being built. It’s not an accident that it seems like all developers are making luxury apartments and mansions for wealthy people, because they’re the only ones as a result of responsible lending that could borrow money anymore.
So by trying to make the banking system more secure, it created a policy that priced an entire generation out of housing by assessing them against a serviceability benchmark that wasn’t needed and was detached from reality. Nobody in Australia had ever been assessed against such a high income servicing benchmark. That’s why the home loan is bad.
I think Responsible Lending did more for housing inequality and causing the housing crisis than anything else in Australia and was a huge regulator intervention market distortion that priced a generation of young people out of credit and therefore out of housing in the name of protecting a banking sector post GFC. I’m a huge believer in and thinker of second and third order effects of decisions. Sometimes when you try to do good and prevent harm you accidentally cause catastrophic amounts of harm. This is an example of that.
The solution is straightforward, just remove Responsible Lending. But by the very name of it, it is unlikely to ever happen as the government would think itself being irresponsible if it ever did so. Even if it would probably be a good thing for everyone. You don’t need to fix something that wasn’t broken and sometimes in trying to fix it, you break it worse.