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.

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.

By August 2025, the Reserve Bank of Australia had cut the cash rate three times, and further modest reductions are anticipated. These are expected to stimulate both housing demand and broader economic activity.

Strong population growth has helped sustain economic momentum and created a steady demand for housing. Government spending has also played a role in keeping unemployment low, with job creation in the public and non-market sectors compensating for slower growth in private sector employment.

Many households delayed major spending decisions in recent years. Low unemployment and high demand for housing should lead more of them to re-enter the housing market in 2026.

Barriers and opportunities

Supply-side constraints, however, are likely to curtail the push created by this growth in demand. Limited land availability and shortages of skilled labour are expected to remain major obstacles to new home building.

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.

In many parts of Australia, the main barrier to growth in home building activity is not demand but the policies of state and local governments, particularly around land release. Recent population shifts show how households respond to these dynamics. People are moving to cities and regions where employment and home ownership opportunities are available.

This has driven a shift in growth away from Sydney and Melbourne towards states that have been able to bring new homes to market more efficiently and at lower cost.
Queensland, South Australia and Western Australia have been at the centre of this growth. Strong population gains and the relatively lower cost of delivering new homes have allowed these states to sustain higher levels of building activity. This trend is expected to continue through 2026 as these markets remain more responsive to demand.

Sydney and Melbourne, in contrast, have lagged behind. High land prices, planning restrictions and significant taxes on new developments have constrained new home building, especially relative to the rapid growth in demand from expanding populations.

With interest rates falling, both cities are expected to experience a lift in activity, although the size of this cycle will depend greatly on how state and local governments ease constraints to new supply.

Renovations on the up

Nationally, detached house commencements are projected to rise steadily over the next three years, peaking at almost 126,000 commencements by 2027. Multi-unit construction is expected to continue increasing in 2026 from earlier decade-lows. However, this is not expected to surpass 100,000 commencements until the end of the decade due to the ongoing challenges with the cost of materials, labour, taxes on investment and planning constraints.

Not all residential building activity is expected to come from the new home segment, with renovation activity likely to remain a major feature of the housing landscape. Many households are choosing to upgrade their existing homes rather than relocate, particularly in markets where land supply is constrained and the cost of new housing is elevated.

For instance, in New South Wales, renovation investment is expected to outpace Victoria by nearly 50 per cent in 2026. This highlights the way the high cost of land in Sydney is pushing buyers towards the renovation market. By way of contrast, Victoria overtook New South Wales in terms of the volume of detached house starts by 57 per cent last year.
Queensland, South Australia and Western Australia are also seeing strong renovation activity, though for different reasons to New South Wales.

In these states, the pressure created by rapid population shifts is encouraging more homeowners to add space and amenities to their family homes. In New South Wales, the shift towards renovations is more a response to long-term constraints in the Sydney basin, where the cost and complexity of new builds have made upgrading the preferred option for more households.

Addressing national housing challenges

Policy settings will ultimately shape the height of the next housing cycle. Governments that reduce taxes, simplify planning and improve access to skilled labour have the potential to unlock significant additional activity. On the other hand, governments that impose new taxes and restrictions risk holding back activity.

There are two major structural factors setting the stage for the expected upturn in 2026. The first is an acute housing shortage that has built up as a result of decades of under-building. The second is rapid population growth.

Structural reforms, rather than cyclical improvement alone, will be needed to address Australia’s housing challenges. 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.

For more housing industry insights, visit HIA Economics.

First published on 21 October 2025