Australia’s horror housing crisis singled out by global think tank

Australians’ living standards are being undermined by restrictions on where homes can be built and the types of businesses being established across the nation’s cities, the OECD has found in a report urging all governments to overhaul planning and competition laws.

The Paris-based think tank singled out Australia as one of a handful of nations that desperately needs to make planning rules more flexible, joining a growing chorus of experts arguing the nation’s economic fortunes are being hamstrung by a dysfunctional housing sector.

The OECD says Australia’s housing crisis is holding the nation back economically.Credit: Nick Moir

In its six-monthly review of the global economy, the OECD argued that the complex rules and regulations governing house construction and land use across Australia were one of the reasons behind the nation’s expensive housing.

It urged all levels of government to reduce red tape, arguing this would not only help bring down housing costs but enable businesses to become more competitive, which in turn would boost the nation’s lagging productivity levels.

“A range of policy actions, including easing zoning restrictions, is needed to strengthen competition and productivity, as well as to raise housing investment to reverse the long-standing decline in housing affordability,” it argued.

The OECD is forecasting the Australian economy will expand 1.8 per cent this year and 2.2 per cent in 2026. Underlying inflation is expected to remain within the Reserve Bank’s 2 to 3 per cent target band.

Financial markets put the chance of a follow-up rate cut by the Reserve Bank at its early July meeting at 80 per cent. Markets believe the official cash rate, now at 3.85 per cent, will be 3.1 per cent by Christmas.

Despite the improved economic outlook, the organisation noted business investment was likely to remain subdued. It found Australia had a large private-sector “investment gap”, with businesses not spending as much as they should on new equipment and buildings.

The OECD said part of this was due to sluggish private demand, while a lack of competition and heavy regulations, particularly around the use of land, meant Australian firms hoarded cash rather than improving plant and machinery.

Nationwide productivity was being held back as businesses and potential home owners found it difficult to build new premises or houses.

“Reducing complexity and introducing greater flexibility in zoning systems, including by being less prescriptive about the specific activities that can be undertaken on a parcel of land, can enable firm entry and growth, as well as the ability of the economy to adapt to ongoing structural change,” it found.

While upgrading its forecasts for the Australian economy, the OECD downgraded its expectations for the globe. The world economy, after growing by 3.3 per cent last year, is now expected to expand by a modest 2.9 per cent this year and next.

Most of the downgrade is due to the impact of Donald Trump’s tariff agenda.

Treasurer Jim Chalmers said Wednesday’s national accounts – expected to show a slowdown in economic growth through the first three months of the year – would reveal the impact of recent natural disasters and “global economic headwinds”.

“This is a stark reminder of the risks posed by tariffs and trade tensions, conflict and fragmentation,” he said.

US President Donald Trump’s tariff agenda has had an impact on Australia’s economic growth. Credit: AP

Those trade tensions, Reserve Bank chief economist Sarah Hunter warned on Tuesday, would be likely to lead to Australian businesses and households saving more and spending less.

Minutes of the bank’s most recent meeting confirmed it had considered a super-sized half percentage point rate cut to offset the risks posed by the Trump tariffs.

Hunter said part of the problem caused by the tariffs – the latest being Trump saying he would double steel and aluminium tariffs to 50 per cent – was the uncertainty they caused to consumers, businesses and affected governments.

“Greater uncertainty about the future can lead households and businesses to save instead of spending and investing, and this is likely to be the case for Australian households and businesses too,” she said.

The Reserve Bank’s chief economist, Sarah Hunter, says Donald Trump’s tariff plans will change Australians’ spending patterns.Credit: Oscar Colman

“And increased borrowing costs and risk premia in global financial markets are likely to spill into domestic markets, further weighing on activity.

“Global uncertainty may weigh substantially on domestic activity if uncertainty remains elevated.”

Hunter said Trump’s trade agenda would be felt through five different channels.

These include changed trade flows as companies shift production to different countries and identify new markets, a change in spending patterns of businesses and households as products hit by tariffs become more expensive, and an increase in general uncertainty.

She said interest rates and government spending may have to change to deal with the fallout from the tariffs, while financial markets would reprice all assets, including shares, government debt, currencies and commodities.

“The broad-based nature of the proposed US tariffs, retaliation from major partners and other policy shifts all have the potential to structurally alter the world economy,” she said.

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