Housing boom incoming? Surprise spike in building approvals sparks affordability debate

By Cameron Kusher -View.com.au Economics Expert

Last week we received confirmation from the Australian Bureau of Statistics (ABS) that the rate of inflation has continued to slow.

The further decline in inflationary pressures will likely result in the Reserve Bank (RBA) reducing official interest rates by 25 basis points when they meet next week.

At the time of writing, market expectations are for another two 25 basis-point reduction in the cash rate this calendar year and a further 25 basis-point cut to the cash rate early in 2026.

The RBA historically targets a rate of inflation of between 2 percent and 3 percent throughout the cycle, nowadays it specifically targets 2.5 percent annual inflation and with headline inflation at 2.1 percent over the year, inflation is below target.

I think the public doesn't always grasp that the rate of escalation of inflation is slowing, but prices are still rising.

It's rare that we go into a period of deflation, so the cost of goods and services remains elevated and is continuing to rise but the slower rate of growth is providing some relief for households.

Let's be honest, deflation is terrible from an economic perspective. When you are in a period of deflation, purchase decisions are delayed because if you buy now and the expectation is that prices will continue to fall, people will decide to wait until the thing they want to purchase is even cheaper.

But I would imagine most households would appreciate the cost of everything falling.

Not that I think there is any chance that the RBA would sit by and let us go into a period of deflation but we would all appreciate lower prices.

The harm caused by the high rate of inflation over recent years will persist for some time, especially considering that wage growth has not kept pace with inflation.

For the housing sector the rapid growth in costs over recent years is pertinent, especially for new housing.

On Friday of last week, the ABS published a quarterly data series which is called the Producer Price Indexes. This data measures price changes of goods and services as they leave or enter the production process.

The Producer Price Index provides insight into what is happening with housing construction and housing materials costs. Over recent years, the cost of constructing housing in Australia has increased substantially. There have been several impacts of these increased housing construction costs.

Firstly, these increased costs are passed on to the end user so new housing has become more expensive and the gap between new and existing house prices has widened making new housing less attractive to many purchasers.

Secondly, higher interest rates have driven up financing costs for developers and increased borrowing costs for would-be purchasers further dampening both the demand for and the supply of new housing.

Thirdly, labour and material shortages in the housing construction sector which built up during the pandemic and have persisted thereafter, particularly labour shortages, have led to a decline in construction activity and led to new housing taking longer to complete.

Finally, because most housing only gets built when there is a sufficient level of pre-commitment to purchase, higher costs to purchase and higher finance costs due to higher interest rates for buyers have contributed to a reduction in new housing supply.

The latest construction cost data from the ABS is encouraging because it points to a slowing of the escalation in these construction costs. When you couple a slower escalation in construction costs with lower interest rates, it is likely that the industry response will be a much-needed increase in the supply of new housing.

Over the June 2025 quarter, both house construction and other residential (which represents medium and higher density housing) construction costs saw stronger growth than over the previous quarter.

Despite this, the annual change in house construction costs fell to 0.3 percent which was the slowest rate of growth since December 2019 and the annual growth in other residential construction costs was 3 percent which was above the rate of inflation but the slowest rate of growth since June 2021.

The escalation in housing material costs saw similar results with an acceleration in growth over the quarter but the annual rate of growth at 1.6 percent was higher than the previous quarter but inline with the December 2024 result. The 1.6 percent annual increase in these costs was also well below the rate of inflation.

Even though the escalation in construction and material costs is easing, these costs are significantly higher over the past five years and have increased by more than inflation which was 26.2 percent higher over the period.

Over the five years to June 2025, housing material costs are 34.5 percent higher, house construction costs are 42.1 percent higher and other residential construction costs are 28.7 percent higher.

Remember, that these increased costs are typically passed on to the end user, that is the person purchasing a new property.

Encouragingly, there is evidence that the housing sector is now starting to respond to the two interest rate cuts we've already had, the expectation of further cuts and the moderation in construction price increases.

The latest building approval data, which is notoriously volatile month-to-month, found that dwelling approvals in June 2025 reached 17,076 for the month which was the highest monthly number since August 2022.

The increase was driven by other dwelling approvals which were 86.6 percent higher than the previous June and at their highest monthly volume since December 2022.

While monthly data is volatile, looking at annual approvals shows that things are improving.

Over the 2024-25 financial year 187,333 dwellings were approved for construction which was 10.2 percent more approvals than the previous financial year and the highest annual approvals since the 12 months to January 2023.

There were 112,483 house approvals over the year which was 7.9 percent higher than the previous financial year and the highest volume since February 2023.

Other dwelling approvals reached 74,849 which was 14.2 percent higher than the previous year and the highest volume since January 2023.

Dwelling approvals are necessary to commence and construct new dwellings but they are still lagging well behind the federal government's National Housing Accord target.

If you aren't familiar, the National Housing Accord is a target to build 1.2 million new homes over the five years from 2024-25 to 2028-29 which comes in at 240,000 new dwellings each year.

Not everything that gets approved will end up built, so in order to hit the Housing Accord target you would need to approve more than 240,000 new dwellings each year. As you can see, although dwelling approvals are increasing, they remain well behind that volume.

Whilst I never thought that the National Housing Accord target was going to be achievable, assuming construction cost escalations remain moderate over the coming years and interest rates fall as expected, I anticipate a lift in dwelling approvals, commencement and construction.

A lift in housing construction would be a welcome development considering how much housing prices and rents have increased over recent years.

More supply can alleviate future price rises and with a rapidly growing national population it's imperative that we grow housing stock in line with our population growth.

I am certainly hopeful that the construction cycle continues to turn and a greater volume of new housing is delivered over the coming years. More housing is going to be a key component of improving housing affordability and alleviating rapid housing price increases.

Cameron Kusher -View.com.au Economics Expert

Cameron has worked as a property research analyst across the Australian property markets for more than a decade and is one of the country's most respected property commentators.

You can subscribe to his insights at Oz Property Insights Substack