In a competitive economy like Australia’s, it would be easy to think the solution to the current housing crisis is an easy one to solve. And while there are multiple contributing factors, the answer is twofold. The first is that everyone within the housing supply chain is acting rationally given the incentives they face. The second is that governments want the private sector to increase the supply of housing, without making a profit.

Leaving aside the demand side, these two factors combine to ensure that the private sector cannot solve the housing shortage. Until every participant in the supply of homes has incentives that are aligned to build more housing, Australia will fail to deliver an adequate supply of homes and rely increasingly on public housing stock.

Council incentives

Builders, developers, real estate agents and most other participants in the supply of new homes to the market are motivated by commercial factors. Over simplified: sell more homes and make a profit. If demand for homes declines, or they aren’t good at their jobs, these people are forced out of the sector. This is a clear, simple motivation.

Local councils are central to the approvals process, but their incentives are inherently averse to the goal of increasing housing supply. They are not financially rewarded for development and, in many cases, are politically and socially penalised for enabling it.

1. Financial disincentives: Councils bear the upfront cost of infrastructure and only recoup these costs over decades. Their ability to borrow for infrastructure expenditure is restricted by state government policy. This is why councils want access to GST revenues and why the federal government stepped in to take over responsibility for infrastructure investment. But these are temporary patches, not structural solutions.
2. Political disincentives: Councillors answer to current residents, not potential future ones. Approving new homes means upsetting voters while benefiting people who don’t yet live in the area. No amount of goodwill can overcome this electoral incentive.
3. Social disincentives: Which is more important – more homes or better cities? We want more from our cities and local councils: wider roads, more parks, better amenities and aesthetics. But at the same time, this ‘gold plating’ of town plans has resulted in more people sleeping in public parks at night. Which is more important?

It is not that local councils are bad at their job. In fact, if they were any better at their job, we would have even fewer homes. The problem is that councils’ incentives are contrary to the goal of increasing housing supply. At every step, they are faced with financial, political and social barriers that are insurmountable with the limited tools permitted to them by state and federal governments.  

This is the core of why the market can’t deliver an adequate supply of homes: local councils are not motivated by a commercial, political or even social force to ensure an adequate supply of homes, yet they are central to the outcome.

Private building certification

In 2005, I was reprimanded in the street by a building engineer at Hobart City Council who explained to me the four reasons why private building certification would never work: first, no private company would take on the responsibility; no insurance company would provide insurance; there is a shortage of building engineers; and the quality of buildings would decline. He was wrong.

Private building certification has dramatically reduced approval times and costs, without a measurable decline in quality. It solved the skills shortage and stripped delays out of the system. Today, no-one suggests reverting to council-controlled building approvals. For any suggestion that the quality of buildings has declined: Mascot Towers!

The building approval bottleneck has been replaced over recent decades with a planning approval bottleneck. It takes over seven months and nearly $20,000 to approve a detached house on a greenfield estate in Victoria. Keep in mind, this is for a detached home built on a block of land recently developed specifically for the purpose of having a detached home constructed. Once again, we’re told private planning certification won’t work and for the same reasons we heard 20 years ago.

A part of the solution to the exorbitant cost of new homes is to reform the incentives councils face by privatising the planning approvals process.

Local councils are the only entity that can write town plans; it is their core competency. Removing the responsibility of assessing compliance with town plans allows them to focus on the one task that no other entity can do, which is to create these plans.

At present, councils create town plans and assess its compliance, making them ‘judge and juror’. A benefit of private planning certification will be that town plans will become ‘objective’ in their content, not ‘subjective’. The concern raised by builders is that due to the shortage of town planners, and they are often FIFO for smaller councils, each time they make their case before the town planner, they are faced with a different list of requirements.

One planner’s need for more ‘articulation’ may be appeased by the builder, only to be replaced by the next planner’s desire for more ‘modulation’, and subsequently ‘fenestration’.

The reduction in the timeframe to approve dwellings will also solve one of the major challenges for councils, which is the shortage of town planners. The privatisation of building certification solved the shortage of building engineers by improving efficiency, so too, private planning certification will ease the shortage of planners.

Let town planners do what they are good at – designing cities – and remove them from the administrative compliance task of approvals.

Profit is not the problem

Governments are increasingly of the view that profit is the problem with housing supply and fail to be sufficiently self-aware that they, themselves, are the cause of these profits.

There are only a few firms capable of navigating the labyrinth of local, state and federal approvals to bring land to market. That these firms earn large profits is not because of a market failure but of government policy failure. Success in navigating the process of ‘approving’ a farm into a new residential suburb has become so rare that the value of this approval is like winning the lottery. In granting a windfall gain to one developer, state governments see it as their obligation to garner this wealth for taxpayers. This is deeply misguided.

In this year’s federal budget, Treasurer Jim Chalmers flagged concern that overseas land developers may be a cause of the housing problem. This is a clear indication that governments haven’t yet worked out that the cause of foreign ownership of Greenfield land is due to government policy and that the solution isn’t less foreign investment, but less government in the market.

In decades past, small farmers on the outskirts of cities could bring land to market and small parcels of a few acres of land could be developed and sold to fund retirement. This ensured an open and competitive market for land supply. Governments have made it increasingly difficult and expensive to bring land to the market, ensuring that there are fewer players in the market, less competition and therefore greater returns for the remaining players.

State governments have identified participants in the supply of new homes, who are making profits, and perhaps ‘super profits’, and they want to be a part of the action. State governments require financial resources to restore their budgets, viewing themselves as wealth creators. They find it abhorrent that a policy decision could result in a profit for an overseas-owned developer. These additional taxes add to the cost of new homes, and the shortage of stock deteriorates further.

The recent introduction of a ‘value capture’ tax in Victoria is a prime example. It’s a relatively efficient and perhaps equitable tax, but without removing other taxes and costs, it is still just another tax on housing supply. This value capture tax is imposed on land developers.

All this cost is then passed through the system, incurring stamp duty at multiple stages, and the GST, before being paid several times over by a household and simply forces up the cost of new homes and increases the value of future land release.

But, each time governments tax new development, fewer firms remain, reducing competition, resulting in higher costs, and even more profit for the remaining firms. Australia’s housing supply system is starting to resemble the mythical Oozlum bird, which flew in circles of increasing complexity until it becomes ultimately self-destructive and disappears (and I will let you Google the result for the folklorically feathered beast).

Undoubtedly, there are actors in the supply chain who are making profits. Some are making extraordinary profits, and are doing so because of poor government policy, not due to market failure. The solution to this is less government, increased competition, not more taxes and more restrictions.

What needs to happen

In an open and competitive market, there should not be a shortage of homes. The market should solve this problem. The issue isn’t that the market has failed, but that government intervention has distorted the incentives of actors in the market.

The housing shortage is primarily a result of government policy failure, making it a very difficult problem for governments to self-solve. They habitually blame foreigners and foreign investors for government policy issues.

Governments need to align their actions with their rhetoric, and that starts with two fundamental reforms:

1. Realign local government incentives: Councils must be financially, politically and socially rewarded for increasing housing supply, or the responsibility for increasing housing supply should be taken out of their hands.
2. Reform the tax base: State and local governments need more stable, less distortionary sources of revenue. Relying on ever-increasing property prices to fund services creates a perverse incentive to further restrict supply.

Until these changes are made, governments will continue relying on short-term patches to cover up the damage done by decades of misaligned incentives.

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

First published on 6 Aug 2025.