Executive summary

Sydney and Melbourne face a serious housing crisis. The shortage of affordable separate housing stock already means that most first home buyers and renters cannot currently find housing suited to their needs in locations of their choice, either in Sydney or Melbourne.

The dominant response on the part of the development industry and many commentators is that governments must get off their hands and unlock the potential for more intensive development of the established suburbs. This has led many to believe that the recent surge in high-rise apartment construction in Sydney and Melbourne will solve the problem of housing affordability and will also lead to more efficient use of infrastructure.

For those looking at the issue from a financial perspective, the escalation in housing prices is seen as a reflection of demand generated from low interest rates, incentives for investors with negative gearing and capital gains tax concessions, and easy access to mortgage credit on the part of investors and owner occupier upgraders. These purchasers can now follow the price escalation to higher levels, because the increase in average household income over the past decade or so enables them to take on higher debt and, in the case of investors, to negatively gear. For the Australian Prudential Regulation Authority this means the answer is to restrict access to borrowing.

While these factors are important in contributing to a lack of affordable housing, the crisis has much deeper roots. The implication is that finding solutions will require new policy responses that address these issues.

These issues have their base in demography, family formation/fertility and migration – with a change in any of these factors having the potential to significantly alter the demand for housing by type of housing in both Melbourne and Sydney.

The current study has been designed to understand the importance of each of these factors in contributing to housing need; and then to apply the insights to project future dwelling need in Melbourne and Sydney. We identify both the projected need for housing, and the type of housing needed by households at different life stages.