Sluggish output is fuelling housing undersupply and keeping Australians locked out of market
Australia has experienced persistently weak productivity growth in recent years, with labour productivity averaging just 0.2% per year between 2017 and 2024 – well below the historical average.
This sluggish productivity has constrained the economy’s supply capacity and contributed to slower growth in incomes, wages and consumption.
Productivity is a simple formula that boils Australian workers down to an Excel spreadsheet – how much gross domestic product (GDP) is produced per hour worked?
But it is a formula that has attracted a lot of political attention, and one with significant implications for the mortgage finance market.
“From a macroeconomic perspective I think increased productivity would be more of a positive for the housing market than a negative,” AMP head of investment strategy and chief economist Shane Oliver (pictured) told MPA.
While improving productivity growth could mean higher real interest rates – which are one of the key components of interest rate levels – Oliver pointed out that stronger productivity should also lead to lower inflation, which is another key component of interest rate levels.
“The net effect of which could actually lead to slightly lower interest rates and hence mortgage rates,” said Oliver of improved productivity.
He explained that higher productivity growth should help accelerate home building completion times, which have blown out substantially over the past decade.
On this note, the data paints a grim picture.
The chronic housing undersupply
According to Australian Bureau of Statistics (ABS) data analysed by right-leaning thinktank The Institute of Public Affairs, in 2014, the average time to build a detached house was about 8.5 months. By 2024, this had risen to approximately 12.7 months – a 50% increase.
This trend is consistent across all states, with Western Australia experiencing the largest jump (85% longer), followed by South Australia (74%), Queensland (58%), New South Wales (39%), Victoria (37%), and Tasmania (29%).
Multiple factors have contributed to this startling rise, including supply chain disruptions, increased regulation, resource diversion to large government projects and labour shortages. Material costs, which rose by 53% over the same period, have been a particular hindrance.
Productivity growth should help address these issues, said Oliver. “This in turn should make it easier to supply more new homes (houses and units) to the market which should make it easier to keep up with underlying population-driven demand for housing and to reduce the accumulated undersupply of housing.”
For the moment, these supply-side issues show little sign of improving. Oliver estimates there is between 200,000 and 300,000 undersupply of dwellings in Australia.
While Prime Minister Anthony Albanese’s Labour government has an ambitious target of building 1.2 million new homes by 2029, these targets have fallen woefully short.
For example, in the March 2025 quarter, only 43,517 new homes were completed nationwide – a 4% drop from the previous quarter – while housing starts, though up 14% to 47,645, remained well below the 60,000 homes per quarter needed to meet the 1.2 million target.
This persistent underperformance means new home approvals are tracking nearly 60,000 below the annual benchmark, with industry leaders attributing the slow pace to discouraging investment policies, lengthy approval processes, high development costs, and post-approval obstacles.
In fact, Australia is building homes at just half the rate seen 30 years ago. There is no clearer sign that Australian productivity needs a boot in the backside.
Matthew Kandelaars, group executive of policy and advocacy at the Property Council, said the March quarter underscored the need for more government support of the housebuilding sector.
“Progress against our housing targets was never going to be linear, but we’ve reached the point where we need to hit housing delivery in top-gear just to keep pace, let alone get ahead,” Kandelaars said.
“It takes more than a year to build a home and more than three years to build an apartment project,” Kandelaars added. “Yet another quarter of poor numbers means more disappointment for future homebuyers and renters.”
Labor is not blind to the productivity problem.
But is Labor serious about addressing productivity?
An Economic Reform Roundtable, scheduled for 19-21 August, will place productivity front and centre.
Some heavy-hitters will be attending the roundtable, including Commonwealth Bank chief executive Matt Comyn, Matthew Addison, chair of the Council of Small Business Organisations of Australia (COSBOA) and former Queensland Treasurer Andrew Fraser.
“Productivity is our primary focus,” Labor Treasurer Jim Chalmers told the National Press Club in June.
Australia’s mortgage brokers will be paying close attention to the outcome of Labor’s productivity chinwag.
If productivity growth improves and accelerates home building, the resulting increase in housing supply could help ease the chronic undersupply that has driven up property prices and made it harder for buyers to enter the market.
This could create greater transaction volumes and more opportunities to serve both new buyers and those looking to refinance. Additionally, if higher productivity leads to lower inflation and potentially lower interest rates, mortgage products may become more affordable and attractive to borrowers.
But change will certainly not happen overnight.
