Policy changes and lower rates expected to boost housing sector
Australia’s housing market is set for renewed growth in 2026, according to an economist, following a period of relief from successive interest rate reductions and ongoing population increases.
The Reserve Bank of Australia has lowered the cash rate three times by August 2025, with further modest cuts expected – moves that are anticipated to boost both housing demand and wider economic activity.
“Household spending is expected to return to relatively more normal patterns from 2026 onwards, with households increasingly returning to the market to buy a new home or undertake a renovation project,” said Maurice Tapang (pictured top), senior economist at the Housing industry Association.
“After more than three years of pressure on households brought about by high inflation and rising interest rates, conditions are starting to ease. The Australian economy has remained remarkably resilient throughout this cycle.”
Australia’s strong population growth has sustained economic momentum, supporting steady demand for housing. Government spending has also helped keep unemployment low, with job creation in the public sector offsetting slower growth in private employment. Many households have postponed major purchases in recent years, but low unemployment and high demand for housing are expected to prompt more buyers to return to the market in 2026.
However, supply-side constraints remain a significant barrier. Limited land availability and shortages of skilled workers are likely to restrict the number of new homes built. “Unless governments take steps to reduce the taxes, charges and regulatory hurdles that add to the cost of building, these capacity constraints will keep a lid on the number of new homes delivered over the remainder of the decade,” Tapang said.
State and local government policies, particularly around land release, are cited as key factors limiting growth in home building. Population movements reflect these dynamics, with people relocating to areas offering better employment and home ownership prospects. Queensland, South Australia and Western Australia have led recent growth, benefiting from strong population gains and lower costs of bringing new homes to market. This trend is expected to continue, as these states remain more responsive to demand.
In contrast, Sydney and Melbourne have lagged behind, with high land prices, planning restrictions and significant taxes on new developments constraining new home construction. While falling interest rates are likely to lift activity in both cities, the extent of this recovery will depend on how governments address supply constraints.
Detached house commencements nationwide are projected to rise over the next three years, reaching nearly 126,000 by 2027. Multi-unit construction is also expected to increase in 2026, although ongoing challenges with material and labour costs, taxes and planning will likely prevent commencements from exceeding 100,000 until later in the decade.
Renovation activity is set to remain a prominent feature of the housing sector, as many households choose to upgrade existing homes rather than move, especially in markets where land supply is tight and new housing is costly. In New South Wales, investment in renovations is forecast to outpace Victoria by almost 50% in 2026, reflecting the high cost of land in Sydney. By comparison, Victoria led New South Wales in detached house starts by 57% last year. Queensland, South Australia and Western Australia are also experiencing strong renovation activity, driven by rapid population growth and the need for additional space and amenities.
Policy decisions will play a decisive role in shaping the next housing cycle. Governments that lower taxes, streamline planning and improve access to skilled labour could unlock greater activity, while those that impose new restrictions risk dampening growth. Two major structural factors underpin the anticipated upturn in 2026: a longstanding housing shortage and rapid population growth.
“Structural reforms, rather than cyclical improvement alone, will be needed to address Australia’s housing challenges,” Tapang said. “This means tackling planning delays, releasing more land, expanding the construction workforce and reducing unnecessary costs that make new housing less affordable.
“The combination of lower interest rates and a return of buyer confidence is expected to drive an improvement in home building activity through 2026. The strength of that recovery will depend on how governments respond to the longstanding structural issues in the housing market.
“There is significant potential for growth but realising it will require decisive action to make it easier, faster and cheaper to build new homes for Australians.”
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