Why are granny flats taking off?

The origin of the sudden surge in granny flat construction lies in the planning system.

New South Wales was the first large state to make it materially easier to build granny flats. In 2009, the NSW Government passed legislation through its State Environmental Planning Policy, which standardised rules for approving granny flats and bypassed council processes.

Unsurprisingly, a HIA survey from 2023 revealed that NSW was building several thousand granny flats a year, while states such as Victoria – with more restrictive rules around such housing – were building only a few hundred.

Seeing NSW’s success, other states took action:

• In Victoria, announcements were made in their Housing Statement in September 2023 to exempt small secondary homes less than 60 square metres from getting a planning permit.
• Queensland amended rental rules for granny flats in September 2022 to allow homeowners to rent them out to anyone outside the family unit.
• In October 2023, the South Australian Government clarified that planning rules do not restrict granny flats from being rented out and occupied by non-family members. Its Residential Tenancies Act was changed to indicate that granny flats could be rented out to non-family members, with the misconception coming from councils adding conditions to whom granny flats could be rented. 
• Western Australia announced changes in January 2024, which removed the requirement to get planning approval for compliant granny flats up to 70 square metres. It also scrapped the previous minimum lot size requirement of 350 square metres.

The results are incoming – builders are planning to be much more active in the granny flats space in the coming years.

Why do people want granny flats?

The past few years have illustrated to us how much Australians value space and amenity.

The pandemic acted as something of a catalyst for this underlying desire. Given all the extra time people were spending at home – and continue to do, with the ongoing trend of working from home – people moved into larger homes in the suburbs and out into the regions.

House building approvals in Australia’s capitals jumped by more than 40% from their previous trough, while the regions jumped almost 60%.

So why would people sacrifice this space for a small backyard granny flat? In short, affordability.

Surges in materials, labour and government tax and regulatory costs saw the cost of building a new home, or undertaking a new renovation project, rise by 30–40% on average.

This forced people back into the established housing market, driving up prices which, combined with the surge in interest rates, pushed housing affordability in both the capitals and the regions to its lowest levels in decades.

In an ‘affordable’ environment, one average income earner could service a mortgage on a median priced dwelling using no more than 30% of their income. In 2024, it took almost 1.9 average income earners to do so in Australia’s capitals, and over 1.7 average income earners in Australia’s regions.

These affordability challenges, combined with recent planning reforms, are motivating the shift towards granny flat construction. It’s likely the desire for space and amenity is still there, especially for those with the financial capacity to afford it. But this is not to say there aren’t those who would prefer a smaller and more manageable home, even in a broadly affordable market.

And without dramatic improvements in affordability, alternative housing types are going to become even more important as a matter of not just preference, but necessity.

Homebuyers aren’t the only ones who benefit

In addition to providing a more affordable alternative to Australian homebuyers, granny flats can also be an important component of policy targets.

The Australian government’s target of 1.2 million new homes over five years can’t be met solely through urban sprawl. Spreading urban footprints further outwards is a costly and time-consuming process. In some markets, it takes over a decade to get a piece of unzoned greenfield land into a shovel ready state.

This includes long and expensive planning and approvals processes, and more expensive infrastructure to service, including transport and utilities. And all that infrastructure requires time and construction workers, which are already in acute shortage across Australia.

Increasing densities within the existing urban footprint, where infrastructure, services, amenity and jobs already exist, becomes all the more important – and granny flats fit the bill. Moreover, as they’ll traditionally be built out of sight in backyards, they’re unlikely to run into the same kind of local opposition around changing neighbourhood character and amenity.

Policymakers need to push forward with a significant number of reforms to improve Australia’s home building capacity, including around infrastructure provision and financing, planning and approvals processes, skilled labour shortages, tax burdens, and lending restrictions.

In the meantime, allowing more construction where a lot of those barriers can be (or have been) more easily addressed will make a valuable contribution to the housing mix and broader affordability.

First published on 15 August 2025