In 2024, HIA released a paper titled Who Pays to Make Water Flow Uphill, laying out a paradox in Australia’s housing system – while governments proclaim the need for more affordable housing, they persist in funding infrastructure through narrow levies on new housing development. This approach has placed the cost of public goods squarely on the shoulders of a small cohort of households, those building a new home. This burden has resulted in fewer new homes being built, leading to an increasingly unaffordable market.

During the 2025 federal election, Prime Minister Anthony Albanese announced a commitment to invest $10 billion to deliver up to 100,000 homes ;reserved only for first home buyers’, with funding to be directed toward enabling infrastructure, land purchases, or construction. This initiative risks replicating the same policy missteps outlined in the original ‘water uphill’ argument.

What’s improved

The federal government’s support for states to build enabling infrastructure is a positive and overdue development. The cost of providing infrastructure and, more importantly, who pays for it, is critical to the price of land. The cost of building water, sewerage, roads and utilities is the most expensive and time-consuming component of bringing land to market. The additional taxes imposed through this process are central to why up to 50 per cent of a new house and land package is comprised of taxes, fees and charges.

Historically, this infrastructure was funded from consolidated revenue and other broad-based tax measures. But from the 1990s onward, this balance shifted. Today, state and local governments have effectively transferred the full cost of public infrastructure to developers, who in turn pass it on to buyers. These costs are layered with cascading charges, raising the final price of land far beyond its undeveloped value.

By stepping back into this space, the government is helping to unpick a decades-old knot. The ‘user pays’ model of infrastructure development is at the core of the housing undersupply, and returning to funding infrastructure from consolidated revenue spreads the cost of public goods across the community. This process not only generates economic activity and increases revenue, but it also addresses the inequity caused by the housing stock shortage, enhancing development feasibility and bringing more homes to market sooner.

If there were ever an instance of government investment ‘paying for itself’, it’s infrastructure that directly enables housing development amid a housing crisis.

What remains the same

However, the positive impact of this funding risks being diminished by the restrictive eligibility condition that homes built with this funding can only be sold to first-home buyers. It isn’t unreasonable if the government is going to provide funding to the states. They are seeking something in return. However, establishing conditionality for first-home buyers could be counterproductive.

This stipulation that a share of land sales must flow to first-home buyers is functionally equivalent to inclusionary zoning. While the government is opening one door with infrastructure investment, it is closing another by constraining who can purchase the resulting homes, narrowing the pool of eligible buyers and distorting market dynamics.

The problem is not the support for first-home buyers itself. HIA supports measures that help Australians achieve homeownership. But limiting sales to one cohort undermines the economic feasibility of the developments being subsidised, which could ultimately lead to reduced sales and delay the delivery of new land to the market.

This contradiction is precisely the trap outlined in “Who Pays to Make Water Flow Uphill”: policies that appear to support housing on one level but create hidden disincentives that ultimately reduce housing output. In this case, the government is both the enabler and restrictor—subsidising infrastructure while limiting its benefit to a single buyer group.

The Albanese Government experienced this same contradiction when it introduced a tax concession for Australian superannuation companies to invest in ‘Build to Rent’ projects. This initiative could have increased investment in housing. After amendments from minor parties, additional costs were added to future ‘Build to Rent’ projects, which will undermine the success of this initiative. These additional charges, although intended to support affordable/essential housing, again rely on a narrow group of households to pay for the cost of subsidised housing.

The public should pay for the cost of public housing, not just a select group of households.

Inclusionary zoning

The broader concern is the growing reliance on conditional housing policies, including inclusionary zoning and similar mandates, as tools for improving perceived affordability. These policies compel developers to reserve a proportion of dwellings for specific income groups or tenure types, often at below-market prices.

HIA has long opposed such policies, not because of their goals but because of their unintended consequences:

• They shift the cost of public housing onto a narrow cohort of households that are renting or seeking to build a new home. 
• They reduce project viability, leading to less overall housing supply and exacerbating the inequity of the housing shortage.
• They create a two-tiered housing market with higher costs for non-targeted buyers.

Inclusionary zoning does not address the housing shortage; it redistributes it. It treats symptoms, not causes, and in doing so, creates new problems. As Who Pays to Make Water Flow Uphill warned: As governments make land more expensive, they are effectively reducing the supply of new homes and working against the problem they are seeking to solve.

Public housing policy

The deeper philosophical issue is one of equity. Affordable and public housing are public goods. All share the benefits of reduced homelessness and increased social and economic inclusion. As such, their costs should also be shared by all.

Placing the cost of affordable housing only on those buildings or purchasing new homes is inequitable. These buyers already face some of the steepest entry barriers in the market. Forcing them to cross-subsidise housing for others deepens those barriers and pushes even more people out of the market.

If there is a public benefit from social, subsidised or affordable housing, it should be funded through broad-based, equitable mechanisms. These methods align cost with benefit, spread the financial load, and support housing delivery without distorting market function.

Avoiding repeating past mistakes

The government’s decision to fund enabling infrastructure is a step in the right direction. It acknowledges the core insight from Who Pays to Make Water Flow Uphill: that the rising cost imposed by governments in delivering land is one of the primary barriers to new housing supply. But tying that infrastructure funding to restrictive buyer conditions threatens to repeat old mistakes in a new form.

To truly increase housing supply and affordability, governments must resist the allure of conditionality. Homes will not be built faster or more affordably if markets are narrowed, if buyers are restricted, and if developers are asked to deliver public goods without public support.

Instead, we need a planning and funding system that is transparent, efficient, and fair. Where the cost of making water flow uphill is shared by all, and the benefits of home ownership are accessible to everyone.

For more housing industry insights, visit the HIA Economics updates.

First published on 9 July 2025