The fear of never owning a home runs rife among the Australian youth of this generation, with the older generation attributing the crisis to problematic budgeting habits. But how bad actually is the problem?
[Chirag Garg is a second year Bachelor of Laws (Honours) student and writer at ESSA with a keen interest in property and the future of the Australian real estate market. He enjoys learning about the real world effects of government policy and how investors and real people are affected by them.]
Australia’s housing affordability is the product of decades of failures in both government policy and market structure. From the consistent undersupply of houses, and restrictive zoning laws and implementation of tax settings that, at the expense of first home buyers, reward investors and the wealthy, the barriers to homeownership have never been higher.
The Scale of the Problem
The fear of never owning a home runs rife among the Australian youth of this generation, with the older generation attributing the crisis to problematic budgeting habits. But how bad actually is the problem? In 2024, the nation saw the price of homes and cost of rent rising by 4.9% and 4.8% respectively , with both increases outpacing the growth of the average household income (Kuru, 2025). Between 2002 and 2024, the house price to income ratio nearly doubled, with the average home now costing close to nine times the average household income (Vigers, 2025). Buying a house in Australia has become an untenable goal for most Australians. In order to comfortably afford a house in today’s market, one must, on average, earn upwards of $200,000, which exceeds the average pre-tax income by more than double (Devine, 2025). Many economists and commentators claim different sources of this issue, but which is it, an issue with the market or policy?
The Supply-Side Argument: A Market That Cannot Keep Up
One explanation for the crisis focuses on the structural issues with housing supply. Only 177,000 new residences were completed in 2024, a number significantly short of the estimated demand of 223,000. Labour shortages, rising costs of materials, and elevated interest rates have reduced project feasibility and constrained new supply (NHSAC, 2025). These factors and the volatile nature of today’s market cause hesitation among developers to undertake new projects which drives the discrepancy between the supply of new homes and the demand.
The supply side view identifies planning and zoning restrictions as a significant problem. Research by the Reserve Bank of Australia findsconfirms that planning rules have pushed up the price of housing by restricting the number of new homes built in a time of strong demand. (Kendall, 2018). These zoning and planning rules play an important role in managing the growth of cities and protecting the character of particular neighbourhoods. However, as Australia confronts a housing affordability crisis, the question is whether the costs of our planning rules outweigh the benefits.
Some academics argue that the “supply shortage” narrative is overstated. They contend that planning approvals have typically exceeded actual construction completions, which goes to suggests that more approvals or loosened planning rules may not substantially accelerate housing delivery (Murray, 2021).
The Policy Distortion Argument: Tax Settings That Inflate Demand
A second major line of analysis holds that government policy, specifically the tax treatment of residential investment property, has inflated housing demand and contributed to the price growth. Negative gearing, which allows investors to offset rental property losses against other income, and the 50% capital gains tax (CGT) discount applied to properties held for more than 12 months are the two areas of taxation policy particularly under scrutiny.
These tax incentives encourage property investment by reducing the cost of holding investment properties. While these measures aim to stimulate rental supply, they have also contributed to increased competition in the housing market. Rather than improving affordability, these policies have often driven up property prices, making it harder for owner occupiers to compete with investors. This suggests a policy failure, where government intervention has distorted market outcomes instead of correcting them. (Daley, 2016).
However, the magnitude of these provisions’ effect on prices is debated. Critics of reform, warn that removing these concessions could reduce the supply of rental properties and push the price of renting higher. Removing negative gearing for rental properties has been predicted to reduce dwelling starts by around 45,500 over five years and increase real rents by more than 2% per year (Brown, 2026).
Conclusion: Is It One or the Other?
The short answer is both.
Economists and commentators have argued that an approach focused solely on supply or solely on tax reform is insufficient, and that a more holistic solution is required (UNSW, 2019). Australia’s housing affordability crisis is neither a simple market failure nor a simple policy failure, it is both simultaneously. Supply constraints are real and well-documented, but so are the effects of tax policy that advantages existing property owners and investors over new entrants. The National Housing Supply and Affordability Council has described the situation as “decades in the making,” a characterisation that reflects persistent failures across multiple domains of governance and market design (NHSAC, 2025). Any credible path forward is likely to require action on planning, taxation, construction capacity, and social housing investment together rather than treating one single lever.
References
“Alan Kohler on How to Fix Australia’s Housing Crisis.” 2019. Unsw.edu.au. 2019. https://www.businessthink.unsw.edu.au/articles/australian-housing-crisis-affordability-prices.
Daley, John, and Danielle Wood. 2016. “Hot Property: Negative Gearing and Capital Gains Tax.” Grattan Institute. April 25, 2016. https://grattan.edu.au/report/hot-property/.
Devine, Aidan. 2025. “Alarming Salary You Now Need to Afford a Home across Australia.” Realestate.com.au. August 6, 2025. https://www.realestate.com.au/news/alarming-salary-you-now-need-to-afford-a-home-across-australia/.
Kendall, Ross, and Peter Tulip. 2018. “The Effect of Zoning on Housing Prices.” SSRN Electronic Journal, March. https://doi.org/10.2139/ssrn.3149272.
Kuru, Scott. 2025. “Crisis: The State of Australia’s Housing System in 2025.” Australianpropertyupdate.com.au. AUSTRALIAN PROPERTY UPDATE. May 22, 2025. https://australianpropertyupdate.com.au/apu/crisis-the-state-of-australias-housing-system-in-2025.
Murray, Cameron K. 2021. “The Australian Housing Supply Myth.” Australian Planner 57 (1): 1–12. https://doi.org/10.1080/07293682.2021.1920991.
NHSAC. 2025. “National Housing Supply and Affordability Council Calls for Reform, Investment and Innovation.” NHSAC. 2025. https://nhsac.gov.au/news/release-state-housing-system-report-2025.
Tulip, Peter. 2024. “Housing Affordability and Supply Restrictions – CIS.” The Centre for Independent Studies. February 7, 2024. https://www.cis.org.au/publication/housing-affordability-and-supply-restrictions/.
Vigers, Benedict, and Madeleine Ambort. 2025. “Australians’ Housing Crisis: Dreams Turn into Nightmares.” Gallup.com. Gallup. January 30, 2025. http://news.gallup.com/poll/655625/australians-housing-crisis-dreams-turn-nightmares.aspx.
