Smarter incentives, more homes

Australia's housing affordability challenge continues to deepen, with the time required to save for a house deposit in capital cities increasing to over 10 years. This challenge stems from insufficient housing supply, with Australia having fewer dwellings per capita than the OECD average, and historically low vacancy in existing homes.

The Australian Government has responded by setting an ambitious target of 1.2 million new well-located homes by the end of FY2029, through the National Housing Accord. Currently, Australia is forecast to achieve 60 per cent of the National Housing Accord’s target, with an uplift of 462,000 homes needed to reach 1.2 million new homes.

Accelerating housing construction to achieve the 1.2 million target would have large impacts on housing affordability. Rental prices could be reduced by $90 per week in well-located areas and housing price growth would slow. Further, the construction would contribute $128 billion in economic activity over the five years and support 368,000 jobs each year.

The target is supported by the $3 billion New Homes Bonus, designed to incentivise more housing construction. However, stakeholder consultation and analysis of previous incentive payment schemes suggest that the New Homes Bonus could be better designed to improve its efficacy. The current retrospective payment structure and high threshold requirements make the scheme challenging for jurisdictions to engage with effectively.

With the exception of the ACT, no state or territory is projected to meet the scheme's threshold within its current timeframe, potentially undermining its effectiveness as an incentive for reform.

To optimise the scheme's impact, the Australian Government should consider:

1. refining the scheme by bringing forward payments and extending its duration to seven years to enable jurisdictions to undertake longer-term reforms
2. increasing the total value to $6 billion to reflect the scale of the housing challenge and ring fencing any unspent funding for future housing supply initiatives
3. strengthening transparency through clear public reporting on progress and establishing forums to share insights between jurisdictions
4. enhancing Australian Government leadership through establishing a Housing Sub-Committee of Cabinet and considering all available levers to support housing supply

These changes would help ensure the New Homes Bonus effectively supports the critical goal of improving housing affordability across Australia, while fostering greater coordination between different levels of government in addressing this complex challenge.

Read full report here.