Australia's Housing Shortage: Why Prices Keep Rising Despite Rate Hikes

The RBA has hiked rates to 3.85% and may go again in May. Normally, higher rates cool the property market. But Australian house prices rose 8.6% in 2025 and are forecast to grow another 5-7% in 2026. The reason is simple: we don't have enough homes. Australia has a cumulative housing shortfall of 200,000 to 300,000 dwellings, and we're not building fast enough to close the gap. Here's why this matters for every buyer, seller, and investor.

The Numbers: How Big Is the Shortage?

AMP chief economist Shane Oliver estimates the accumulated housing shortfall at 200,000 to 300,000 dwellings after years of under-building relative to population growth. The numbers tell a clear story:

The National Housing Supply and Affordability Council forecasts that only 938,000 new dwellings will be built over the Housing Accord's five-year period ending June 2029 - a shortfall of 262,000 against the 1.2 million target. No state or territory is on track to meet its share.

How Did We Get Here?

Australia's housing supply was largely in balance up to the mid-2000s. Then several factors combined to create the structural deficit we see today:

Population Growth Outpaced Building

Net overseas migration more than doubled from the mid-2000s, pushing population demand well ahead of housing supply. In recent years, migration has surged to record levels while construction has struggled to keep pace.

Construction Costs Soared

Building costs have risen more than 40% since the start of the COVID-19 pandemic. Materials, labour, and land costs have all surged, making many planned developments financially unviable.

Builder Insolvencies

High rates of builder insolvencies have badly impacted capacity in the residential construction industry. Many projects have been delayed or abandoned as builders go under.

Labour Shortages

The construction industry faces persistent skilled labour shortages, limiting how quickly new homes can be built even when approvals are granted.

Why Rate Hikes Haven't Crashed Prices

In a normal market, higher interest rates reduce borrowing capacity, dampen demand, and push prices down. But Australia isn't a normal market right now. Here's why prices have proven resilient:

• Supply is the dominant force: When there are far fewer homes than buyers, prices have a floor. Even with reduced borrowing power, competition for limited stock keeps prices elevated.
• Sydney listings are down: Total Sydney listings fell 2.9% year-on-year in January 2026. Fewer homes for sale means more competition for each one.
• Population growth continues: Australia's population keeps growing, adding demand that construction can't match.
• Rental pressure pushes buyers: With rents at record highs ($780/week for Sydney houses), some renters are motivated to buy even at elevated prices to escape rising rents.
• Government schemes add demand: The 5% deposit scheme and Help to Buy have brought more buyers into the market without adding a single new home.

What It Means for Sydney

Sydney's housing market is particularly affected by the shortage. The median house price sits at $1,598,819, and forecasters expect further growth:

Sydney's persistent undersupply of housing continues to underpin price growth for both new and existing homes. While growth is expected to be slower and more uneven than 2025, a material downturn looks unlikely without a significant deterioration in employment or credit availability.

What This Means for Buyers

Don't Wait for a Price Crash

The structural housing shortage means a significant price correction is unlikely unless there's a severe economic recession. Waiting for prices to "come back down" could mean watching them rise another 5-7% while you save.

Focus on Value, Not Timing

Rather than trying to time the market, focus on finding a property that meets your needs at a price you can afford. With limited supply, well-located properties in growing suburbs will continue to hold their value.

Consider Units and Townhouses

With house prices at record highs, units and townhouses offer a more affordable entry point. Unit prices in Sydney sit at a median of $903,210 - roughly $695,000 less than the median house price.

What This Means for Investors

Rental Yields Remain Strong

With vacancy rates below 2% across capital cities and rents at record highs, rental income is strong. The housing shortage ensures ongoing demand for rental properties.

Capital Growth Outlook Is Positive

While rate hikes create headwinds, the supply-demand imbalance provides a structural tailwind for property values. More affordable capitals like Brisbane, Perth, and Adelaide are expected to outperform Sydney and Melbourne in 2026.

Will the Shortage Ever Be Fixed?

According to AMP's Shane Oliver, if net overseas migration is reduced to around 200,000 per year and construction hits 240,000 dwellings annually, "over five years I reckon we probably would have gotten on top of the housing shortage."

But neither of those conditions is currently being met. Migration remains elevated and construction approvals are running well below target. Realistically, the housing shortage will take years to resolve - if it's resolved at all.

For buyers and investors, this means the fundamental driver of Australian property prices - not enough homes for the people who need them - isn't going away anytime soon.