Bridging The Housing Gap: Strategies for Enabling Affordable Housing Development
Introduction
The Australian affordable housing system is not merely facing a cyclical downturn; it is experiencing a structural crisis decades in the making. According to KPMG Australia’s August 2025 report, “Bridging the Housing Gap,” the nation has reached a critical juncture where market mechanisms alone can no longer deliver adequate affordable housing for a significant portion of the population. The report provides a high-level overview of the current crisis and proposes a major economic reform initiative: the Housing Delivery Collaboration Program.
For over thirty years, insufficient investment in social and affordable housing has exposed lower-income households to the volatility of an increasingly unaffordable private sector. This historical underfunding has led to a net loss of social housing as a percentage of total stock. While programs like the National Rental Affordability Scheme (NRAS) temporarily slowed the undersupply, the COVID-19 pandemic acted as an accelerator, triggering steep increases in construction costs and rendering large areas of Australia commercially unfeasible for development, even in the face of robust demand.
The result is a sharp escalation in home prices and rents, coupled with historically low vacancy rates. KPMG’s analysis, based on 2023-24 data, reveals a stark conclusion: the housing market has fundamentally failed to adequately serve households earning between 110,000 annually – a cohort representing approximately one-third of all Australian households. Current policy efforts, such as public housing investments and the Housing Australia Future Fund Facility (HAFFF), are primarily aimed at those earning below $50,000. While essential, these initiatives leave a massive “missing middle” without viable options. This summary explores the problem’s root causes, the complex web of players involved, and KPMG’s proposed solution framework for enabling affordable housing development.
Chapter 1: The Problem - Why Affordable Housing Remains Elusive
1.1 Housing Affordability and Availability: A Dual Crisis
The shortage of affordable housing in Australia is driven by a vicious cycle of supply and demand. On the supply side, development has not kept pace with population growth. The housing continuum framework illustrates a spectrum from emergency housing to market homeownership. However, rising housing stress is pushing more people toward the non-market end. Analyzing rental supply by type between 2011 and 2016 shows that new supply has increasingly been concentrated at higher price points. Strict zoning laws, escalating land costs, and limited infill space make it difficult to construct smaller, more affordable units that align with the needs of diverse family types.
1.2 What Affordable Housing Do People Want? The Aspirations Gap
Household needs are complex and evolve across the lifecycle. The Australian Housing and Urban Research Institute (AHURI) finds that three-bedroom homes are associated with the greatest satisfaction, particularly for older Australians. While over 85% of mid-life and older Australians prefer houses, only 67% of younger Australians share this preference; many younger people (21%) desire smaller dwellings in high-amenity areas. Interestingly, there is an appetite for non-traditional dwelling types, such as tiny houses. Despite this, detached or semi-detached three-bedroom homes remain the dominant long-term aspiration.
A significant challenge is the mismatch between space and need. For households headed by those aged 25-34, about 30% have two or more spare bedrooms, but this rises to 60% for those aged 65-74. Older adults often remain in larger homes due to emotional attachment, the overwhelming process of downsizing, difficulty finding suitable single-level housing, and financial barriers like stamp duty. Understanding these evolving preferences is crucial for developers and policymakers to ensure new supply meets long-term aspirations and optimizes residential space.
1.3 Economic and Social Costs of Unaffordability
Low housing affordability carries profound economic costs beyond individual stress. It reduces labor market depth, forcing workers to live further from employment hubs and causing talent migration to more affordable regions. It leads to poorer job matching, as high housing costs restrict mobility, leaving employers unable to attract or retain staff. Human capital accumulation suffers because families have less disposable income for education and professional development, affecting children’s long-term outcomes.
Furthermore, unaffordability reduces tax revenues (due to lower taxable income and consumption), increases social costs (greater demand for public housing and healthcare), exacerbates economic inequality (by hindering wealth-building through homeownership), and stifles overall economic activity. Even birth rates are affected, with more expensive, smaller dwellings correlating with lower total fertility rates. KPMG argues that all these problems can be quantified, providing a consistent annual benefit for every additional home delivered across the country.
1.4 Commercial Feasibility: The Developer’s Perspective
To solve the housing crisis, KPMG argues we must shift from asking “How much can households afford to pay?” to “At what price can developers afford to build?” Developers are generally price-takers, accepting prevailing market costs for land, construction, taxes, and sales prices. The critical concept here is Residual Land Value (RLV) – the maximum price a developer will pay for land after accounting for all development costs, including construction, design, approvals, and a required margin for profit and risk. If a landowner demands more than the RLV, the project is commercially unfeasible.
Complicating matters, government taxes and charges can represent between 10-25% of a new dwelling’s purchase price. Since 2020, a 30-40% increase in construction prices combined with 40-50% increases in land values have reshaped the feasibility paradigm. This has led to widespread construction company insolvencies (from 1,284 administrations in 2021-22 to 2,977 in 2023-24) and a loss of key trades workers (carpenters, painters) as a share of the workforce. Consequently, developers have become risk-averse, shifting focus to less risky, higher-end projects.
1.5 The Pandemic Construction Price Shock: A Market Reshaped
The financial collapse of construction companies has shifted new housing delivery to higher price points. In 2018-19, two-thirds of new dwellings were in the 700,000 range. By 2023-24, that share fell to less than one-quarter, while the proportion of new properties over 50,000-200,000. Build-to-Rent (BTR) has emerged for the 80,000 range, but the key conclusion is stark: there is no significant developer activity (private, public, or non-profit) focused on providing housing for households earning between 110,000. This is the “missing middle” that current policies have failed to address.
Chapter 2: The Solution – A Proposed Housing Delivery Collaboration Program
2.1 A Coordinated, National Competition Policy-Style Approach
The housing challenge is not the result of any single event but decades of economic trends and policy settings. Three decades of prices rising faster than incomes, heavy taxes on new housing, planning system distortions, and post-pandemic cost shocks have led to market failure. KPMG proposes a coordinated approach inspired by the National Competition Policy (NCP) of the 1990s, where all levels of government worked together to address failing markets. An NCP-style framework would align the key beneficiaries: the taxpayers living in the homes, the Commonwealth collecting tax revenue, and the state/local governments bearing infrastructure costs. The report points to the successful Indemnity Insurance Fund for medical practitioners as an example of structuring complex solutions to overcome market failure.
The proposed Housing Delivery Collaboration Program would not replace existing efforts for the most vulnerable but would add a layer specifically targeting the 110,000 income cohort. It would draw upon existing frameworks (Housing Accord, HAFFF, HAIF, state targets) to ensure continuity and speed.
2.2 Agreeing on Feasible and Realisable Capacity Targets
While the National Housing Accord set an ambitious target of 1.2 million new homes by mid-2029, current approval data indicates this target will not be met due to poor commercial feasibility at affordable price points. KPMG argues that governments need to move beyond theoretical capacity targets and develop robust targets based on three distinct levels:
Theoretical Housing Capacity: The maximum building envelopes based on zoning (e.g., 4-5 million dwellings nationally). This is overly optimistic.
Feasible Housing Capacity: What is actually profitable considering land costs, building costs, and sales values (e.g., 2.4-3 million dwellings). This reveals the commercial feasibility gap.
Realisable Housing Capacity: The practical “likelihood of development” over the next three years, considering dwelling typology, industry capacity, local market conditions, and developer motivation (e.g., 150,000-190,000 dwellings per year).
By linking these capacity shortfalls to the specific cohorts who would live in those homes, governments can quantify the economic activity and taxation revenue at risk. This dynamic assessment would adjust over time with market cycles, ensuring resources are aligned with real-time needs.
2.3 Closing the Commercial Feasibility Gap: Options and Mechanisms
KPMG identifies five groupings of policy levers to close the commercial feasibility gap:
Financing: Improve financing costs for developers (e.g., expanding HAFFF to include other not-for-profit developers).
Capacity: Increase realisable capacity on existing land via funding for intergenerational local and regional infrastructure (open spaces, roads, community facilities) rather than relying on heavy infrastructure contributions on new developments.
Tenure Model: Shift tenure models to allow longer-term financial benefits (e.g., low-interest loans for not-for-profit housing cooperatives).
Risk Reduction: Provide cashbacks for fees, charges, and taxes levied by state/local governments on affordable housing, paid only after sale.
Construction Costs: Provide cashbacks for infrastructure charges and grants for affordable housing, contingent on the sale price remaining in an affordable range.
A critical insight: the per-dwelling subsidy required for the missing middle (110k) would be significantly lower than existing programs. For example, the Victorian Big Housing Build was ~350,000 per dwelling both aimed at much lower-income cohorts. Because middle-income households have greater capacity to pay, the subsidy can be much smaller. Without this program, these households will increasingly call on even more heavily subsidized social housing, as seen in growing waiting lists.
Chapter 3: Next Steps: A Roadmap for Reform
The development of the Housing Delivery Collaboration Program is a significant economic reform initiative requiring concerted effort from all levels of government and the private sector. Rather than starting from scratch, it leverages existing structures like the Housing Accord and state supply targets. The program is dynamic: as real wages increase faster than construction costs, subsidies will naturally fall. Funding for intergenerational infrastructure will come in waves as new development fronts open.
KPMG provides a high-level step-by-step process (Table 4 in the report):
Estimate future demand based on shortfalls and population growth (3-5 years).
Estimate theoretical development capacity using zoning and development controls.
Estimate preliminary feasible capacity by analyzing land costs, building expenses, and sales values to find profitable typologies.
Work with the development sector to estimate realisable capacity, considering risks and council controls.
Developers conduct commercial feasibility studies and then seek HDCP funding (concessional loans, cashbacks, target grants).
Project completed and sold/leased; then future demand is recalibrated and capacities re-estimated.
Conclusion: A Critical Juncture
Australia’s housing market is at a critical juncture. The KPMG report makes clear that continuing current policies will leave one-third of households – the crucial middle-income workforce earning between 110,000 – in increasing housing stress, with cascading negative impacts on labor markets, economic productivity, and government revenues.
The proposed Housing Delivery Collaboration Program offers a pragmatic, economically-grounded pathway forward. It acknowledges that government action must go beyond supporting only the most vulnerable. By systematically assessing feasible and realisable capacity, and by deploying targeted, dynamic financial mechanisms to close the commercial feasibility gap, Australia can begin to bridge the housing gap.
The program does not advocate for a blank sheet of paper but rather a strategic recalibration of existing frameworks to serve the missing middle. Without such decisive, collaborative action, the dream of secure, affordable housing will remain out of reach for millions of Australian workers, and the broader economy will continue to pay the price. The report concludes that collaborative efforts through initiatives like the Housing Delivery Collaboration Program can drive sustainable, accessible growth and ensure housing security for all Australians.
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