This paper explores how housing supply responds to demand and implications for affordability. It draws attention to some commonly overlooked themes and unpacks assumptions about factors that affect housing supply. The paper provides an outlook on current evidence and offers insights into the dynamics of housing supply.

Key points

• Households are facing significant housing affordability challenges. Current policy attention in NSW and Australia is focused on increasing new housing supply to meet increases in demand.
• If new housing supply cannot respond to demand-induced price changes, this can lead to further price increases and a decline in housing affordability.
• Policy discussions tend to treat ‘housing supply’ as being synonymous with new housing supply. This is flawed because overall market housing supply is usually dominated by dwellings from the existing stock.
• The responsiveness of new housing supply to demand changes varies widely across spatial and sectoral submarkets.
• The planning system is often cited as a key barrier to delivering new housing supply, which raises the price of housing relative to the supply cost. Discussion around planning reform should be accompanied by consideration of the highly localised nature of planning systems, zoned capacities, and other non-planning factors that can raise dwelling prices relative to the supply cost.
• Developers can also affect the rate at which new housing supply flows onto the market. For example, even in the absence of planning controls, developers can pace development projects to slow down the supply of new housing to increase their profits.
• Housing demand has important interactions with housing supply, which can confound the supply-price relationship.
• Downward pressure of new housing supply on prices plays out over very long time periods. In the short-run, new housing development may not respond to an increase in demand to the level needed to avoid an increase in housing prices.