Housing Construction Productivity: Can We Fix It?
Introduction
Housing construction productivity is currently in long-term decline across Australia, posing a critical barrier to solving the nation's housing affordability crisis. According to the Productivity Commission’s February 2025 research paper, Can We Fix It? the sector has underperformed the broader economy for three decades, with significant implications for supply targets and cost-of-living pressures.
This comprehensive analysis unpacks the Commission’s findings on why dwelling construction efficiency is falling and outlines seven specific reform directions designed to reverse this trend.The Scale of the Housing Construction Productivity Decline
Understanding the severity of the issue requires looking beyond headline completion numbers. The Productivity Commission developed novel proxy measures to track housing construction productivity over the past 30 years because official national accounts data does not isolate dwelling construction from the wider construction sector. These estimates reveal a stark deterioration in performance since 1994-95.
Physical productivity, measured as the number of dwellings completed per hour worked, has plummeted by 53%. While some of this decline reflects larger and higher-quality homes, even labor productivity—measured as Gross Value Added (GVA) per hour worked and adjusted for quality improvements—has fallen by 12%.
In sharp contrast, whole-economy labor productivity increased by 49% over the same period. To contextualize this gap, if the broader economy had stagnated at the same rate as the residential building sector, average Australian incomes would be approximately 41% lower today.
The decline in housing construction productivity is not uniform across all dwelling types. Labor productivity in detached house construction has fallen by 25% since 2001-02. Conversely, higher-density construction (apartments and townhouses) saw a 5% increase over the same period, including a brief era of rapid growth between 2005 and 2014.
However, because detached houses still comprise the majority of new builds, their poor performance weighs heavily on the aggregate sector outcomes. Importantly, the Commission determined that measurement error and uncaptured quality improvements cannot explain this persistent underperformance; even applying generous international estimates for mismeasurement, the sector still significantly lags the wider economy.
Why Is Housing Construction Productivity Stagnating?
There is no single driver for the slump in housing construction productivity. Instead, it is the result of compounding structural, regulatory, and cultural factors that have made building slower, more expensive, and less innovative.
Complexity and Cascading Failures
The development process is inherently complex and sequential. A typical project involves land acquisition, planning approvals, financing, infrastructure connection, and physical construction. Because these steps are highly interdependent, delays in one area create "cascading failures."
For example, a delay in obtaining a construction certificate or connecting utilities can push back subsequent trades, increase holding costs, and reduce effective output. Stakeholders reported that major developments now routinely take five to ten years, with actual physical construction often accounting for less than half of that timeline.
Regulatory Burden and Inconsistency
Policy settings weigh heavily on housing construction productivity through sheer volume and lack of coordination. Three levels of government impose rules affecting where, how, and what housing looks like. The National Construction Code (NCC) alone exceeds 2,000 pages, and planning regulations in some locales run into thousands more. Beyond volume, inconsistency is a major drag.
Jurisdictional variations in NCC implementation and local government design guidelines prevent firms from standardizing processes or scaling up efficiently. Furthermore, frequent updates to building codes create a "chilling effect" on innovation, as firms fear investing in new methods that may become non-compliant with the next regulatory cycle.
Industry Fragmentation and Low Innovation
The residential construction sector is characterized by small firm sizes and low concentration. The average residential building firm employs fewer than two people, and the top four firms hold only 12% market share. This fragmentation limits economies of scale and reduces the capacity for Research and Development (R&D). Only 35% of construction firms are considered "innovation-active," and R&D expenditure per dollar of GVA is among the lowest of any industry.
Digital technology adoption is similarly sluggish, with the sector ranking last in using data for demand forecasting or design. Prefabrication, which offers significant efficiency gains, accounts for less than 5% of total construction due to regulatory barriers, financing challenges, and consumer preferences.
Workforce Constraints
While the construction workforce has grown, it faces structural rigidities that impact housing construction productivity. Occupational licensing requirements vary across states, hindering labor mobility despite Automatic Mutual Recognition schemes that still contain significant exemptions.
Migration settings also create friction; overseas qualified tradespeople often face duplicate skills assessments costing thousands of dollars and taking up to 18 months. Additionally, apprenticeship commencements and completions have stagnated, and restrictive training pathways limit the flexibility needed to address acute skills shortages.
Seven Reform Directions to Boost Housing Construction Productivity
To turn the dial on these entrenched issues, the Productivity Commission identified seven targeted reform directions. These recommendations focus on reducing unnecessary burdens while maintaining essential safety and quality standards.
1. Coordinating Approvals and Resourcing Regulators
Governments must move beyond siloed planning reforms to establish end-to-end coordination bodies. Agencies like Queensland’s State Assessment and Referral Agency (SARA) provide a model for managing approvals across the entire development lifecycle, not just initial planning.
Crucially, regulators—particularly local governments—must be adequately resourced to meet statutory timeframes. Performance targets should be differentiated by project complexity and extended to cover post-approval periods where significant delays currently occur.
2. Independent Review of Building Regulations
An independent review of the NCC and its state-level implementation is overdue. This review should assess whether code objectives remain appropriate, evaluate governance arrangements, and examine local government rules that effectively override national standards. Given the disruption caused by frequent changes, pausing regularly scheduled NCC updates until this review is complete could provide necessary stability for industry investment.
3. Improving Building Quality Information
Rather than relying solely on prescriptive minimum standards, governments should expand rating schemes that inform consumers about build quality. Systems like NSW’s iCIRT star ratings or ACT energy efficiency disclosures help create price premiums for better builders. Better information asymmetry correction incentivizes quality without imposing blanket regulatory costs that dampen housing construction productivity.
4. Extension Services for Innovation Diffusion
Drawing on the successful agricultural extension model, the Australian Government should trial services to promote technology diffusion in housing. Piloted through AusIndustry, these services could help small firms adopt cost-effective innovations and navigate compliance with new standards, bridging the gap between R&D and practical application.
5. Adequate R&D Funding
The Strategic Examination of Research and Development should specifically assess whether public funding for housing R&D is commensurate with the sector's social importance and productivity challenges. Cooperative Research Centers (CRCs) could be directed to focus on innovations that directly lower construction costs and improve housing construction productivity.
6. Removing Barriers to Modern Methods of Construction
Regulatory frameworks must be updated to explicitly accommodate prefabricated and modular construction. This includes creating deemed-to-satisfy pathways in the NCC, developing manufacturer certification schemes, and harmonizing approval processes across jurisdictions. Governments are already progressing some of these changes, but sustained effort is required to overcome legacy biases toward traditional onsite methods.
7. Enhancing Workforce Flexibility
Improving labor supply requires implementing previous PC recommendations on occupational licensing and migration. Regular independent reviews of licensing systems should aim to reduce unnecessary entry barriers while maintaining safety. Migration pathways need streamlining to eliminate duplicate assessments for skilled tradespeople.
Additionally, apprenticeship support services should be improved to boost completion rates and ensure training aligns with modern industry needs.
Conclusion
The evidence presented in Can We Fix It? makes clear that declining housing construction productivity is not an inevitable feature of the building industry but rather the cumulative result of policy choices and structural inefficiencies. Historical data shows that construction productivity once kept pace with, and sometimes exceeded, broader economic growth. Restoring this trajectory requires governments to treat productivity as a central pillar of housing policy, alongside planning and zoning reforms.
By implementing coordinated approvals, rationalizing building regulations, fostering innovation, and improving workforce flexibility, policymakers can lower construction costs and increase viable housing supply.
The value of this research lies in its actionable roadmap; addressing these systemic issues is essential not only for meeting the National Housing Accord targets but for ensuring long-term housing affordability and economic prosperity for Australians. Continued monitoring of housing construction productivity metrics will be vital to assessing the effectiveness of these reforms and sustaining momentum in this critical sector.