Slow home building holds back Australia as Reserve Bank meets to consider rates cut

Building a house in Australia takes almost twice as long as a decade ago as building firms fail to adopt new techniques, locking young people out of affordable housing and crushing productivity in the sector.

Ahead of a Reserve Bank board meeting, which is likely to deliver borrowers the first cut in official interest rates in five years, research from the Productivity Commission found the country is building half as many homes per hour worked as it did in 1995.

Productivity across housing construction has fallen over the past 30 years and the time it takes to build a home has rocketed.Credit: Arsineh Houspian

Productivity in the housing sector has tumbled by 12 per cent over the past 30 years while it has climbed by 49 per cent across the rest of the economy. If economy-wide productivity had kept pace with housing then the nation would be $1.1 trillion a year poorer.

In the 10 years to 2023-24, the average time to build a detached house climbed to 10.4 months from 6.4 months. Over the same period, the time to build new townhouses increased to 12.9 months from 9.4 months while for a block of apartments, construction time jumped to 27.8 months from 18.5 months.

Commission chair Danielle Wood said young people were paying the price for poor productivity in the sector.

“Too many Australians, particularly younger Australians, are struggling to afford a home in which to live,” she said.

“Lifting the productivity of home building will deliver more homes, regardless of what is happening with the workforce, interest rates or costs.”

The report found a complex, slow approval process meant the timeline for new housing estates or apartment complexes can drag out for a decade or more, with only a small part of that actually spent on construction. It recommended all governments support an independent review of building regulation including local council rules around new homes.

The commission found a lack of innovation across the sector with many businesses unable or unwilling to change how they build. There has been little take-up of advanced building technologies or processes such as pre-fabrication.

This is partly related to the small scale of many building firms. The average residential building company has fewer than two employees, much smaller than the average Australian business. Productivity is higher for apartment blocks than individual houses.

The commission also blames a shortage of skilled workers for the sector’s woeful productivity levels. It argues that inconsistent occupational licensing arrangements across the country, limited opportunities for migrants to enter the sector and poor numbers of apprenticeships have all hurt housing construction.

While the commission’s research focused on Australia, it found that productivity in the home building sector has cratered across the world. Compared with countries such as the United States and Britain, productivity on Australian building sites is higher.

Wood said dealing with the regulation around home construction had to be tackled by all governments.

“The sheer volume of regulation has a deadening effect on productivity. If governments are serious about getting more homes built, then they need to think harder about how their decisions unnecessarily restrict housing development and slow down the rate of new home building,” she said.

Master Builders Australia chief executive Denita Wawn said the commission had made sensible recommendations that should be considered by all governments.

Productivity Commission chair Danielle Wood says young Australians are the ones most hurt by falling housing productivity.Credit: Alex Ellinghausen

“Just like the housing crisis, there is no silver bullet to solving woeful productivity in the industry, and it requires a co-ordinated and comprehensive approach by all levels of government,” she said.

Housing construction has also been affected by the Reserve Bank’s sharp increase in official interest rates which financial markets and most economists expect to start reversing following its two-day board meeting which begins on Monday.

For a household with a $600,000 mortgage, a quarter percentage point cut in the cash rate would slice the monthly repayments by $100.

In NSW, where the average new loan has hit a record high of $811,000, the monthly savings from a quarter percentage point cut would be $133 or almost $1600 a year.

Westpac chief economist Luci Ellis said the central bank could be confident that inflation, both headline and underlying, continued to point to falling price pressures which would enable the bank to cut interest rates this week.

Nomura economist Andrew Ticehurst said the long wait for a rate cut for Australian borrowers was coming to an end, aided by the economic growth risks posed by US President Donald Trump’s recent tariff announcements.

“We expect the RBA to note much uncertainty here, but think it would likely be more concerned about downside growth risks than upside inflation risks stemming from higher tariffs,” he said.

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