Tackling an evolving housing crisis

Australia is currently facing a housing crisis, driven by limited supply, development constraints and high property prices. The crisis stems from a complex interaction of economic factors, policy decisions and demographic changes.

What is the government doing to help the housing crisis?

Federal and state governments in Australia share the responsibility of ensuring access to safe, adequate and affordable housing.

Unlike traditional infrastructure, where the government's role is more defined, housing can present a raft of additional challenges as the primary responsibility for delivery is generally a private sector role.

Careful consideration is required by governments on the level of intervention, control and impact, with the ability to continually evolve with market changes. Governments have aligned to address housing issues through a range of solutions predominantly targeting the supply side, including:

• Funding for social and affordable housing such as the Housing Australia Future Fund (HAFF), National Housing Accord Facility (NHAF) and various state-specific initiatives
• Financial incentives and concessions to encourage private-sector investment
• Regulatory reforms, to streamline approvals and reduce red tape
• Land availability by identifying or unlocking underutilised government land that could be used for housing development.

Emerging challenges

Direct funding has traditionally targeted the lower and most vulnerable end of the housing continuum (i.e., social, affordable, and first-home buyers). However, key worker and median-income housing market cohorts are also now being impacted, exacerbated by cost-of-living pressures.

Housing issues are extending into private segments of the housing market, where government intervention can be more contentious. This intervention may become necessary if there is market failure in traditional delivery.

Some of the factors and emerging challenges include:

• Housing affordability – Home ownership is becoming less attainable and may ultimately be unachievable in some areas. New housing models are required to provide secure and long-term rental accommodation.
• Development viability – Construction costs and property values have continued to outpace real wage growth in most cities. Despite the continued high demand for new housing, an increasing number of developers are struggling to stack up new projects in the current market.
• Construction capacity – Continued impacts on supply chains, trade/workforce availability and cash flow remain challenging for builders.

Sector spotlight: Regional housing

The crisis in regional areas is exacerbated by several unique challenges, notably, far higher construction costs associated with building in these locations. Lower housing values, coupled with the absence of profitable returns for developers, make private sector investment unviable, often leading to a preference for established homes over new builds. Market volatility driven by microeconomic factors further impacts demand and value, complicating the housing landscape.

Remote areas also face increased maintenance and operational costs, including higher expenses for insurance, power, and utilities. This situation places significant pressure on local communities, especially key workers, who are essential for the functioning and growth of these regions. The critical shortage of new housing supply across several of our regional towns and cities threatens the sustainability and prosperity of these communities, underlining the urgent need for more targeted intervention.

Sector spotlight: Market rental housing supply

The current housing market faces significant challenges, characterised by record low vacancy rates and escalating rents driven by a persistent lack of housing supply. While housing alternatives such as Build-to-Rent (BtR) investments offer the long-term potential to deliver supply at scale, their impact will take time to materialise, leaving immediate pressures unaddressed. Rising construction costs and challenging tax settings, including GST leakage, further complicate the viability of BtR-style development across Australia, particularly outside of our major capital cities where projects may not achieve rental premiums.

Governments' focus so far has been skewed towards social and affordable housing, but we are now seeing increased activity coupled with investment from institutional investors, including super funds.

However, funding to support social and affordable housing at the low-end and BtR driving higher-end rental products leaves a large gap in our private rental market. As the market grapples with these intersecting issues, a more comprehensive approach may be required to ensure housing supply meets demand across all segments.

The common challenges for government?

Governments face multiple challenges in addressing the housing crisis, including:

• Identifying and balancing intervention where market failures exist while fostering market competition
• Clearly assessing the risks and benefits of inaction (direct/indirect) considering financial, economic and social impacts
• Evaluating diverse proposals and solutions effectively, recognising the challenges across the sector are not uniform
• Determining how to achieve fair risk allocation between transaction parties and clearly defining roles and expectations
• Prioritising investment decisions strategically and within resource limits, considering scale, geographic focus
• Demonstrating how government funding delivers value for money and results in timely outcomes
• Maintaining transparency to minimise commercial and political scrutiny.

How BDO can help

Our experienced real estate advisory team understands the property investment and development process, along with the commercial and financial metrics associated with each element of the sector.

Our team include individuals with direct experience in property valuation, property financing and structured development transactions.

We can assist in the preparation of concise and comprehensive investment or business case documents to help you better understand the key risks and opportunities of a real estate-related project.

Contact us to discuss your next project.