For many Australians, the idea of home ownership seems increasingly out of reach. Major cities like Sydney and Melbourne consistently rank among the world’s most unaffordable housing markets.

But this wasn’t always the case.

In 1987, the national median price-to-income ratio for housing sat at a manageable 2.8, according to the Centre for Demographics at Chapman University. Today, that number has climbed with Sydney, Melbourne and Adelaide now classified as “impossibly unaffordable”. Sydney is now at 13.8, Melbourne at 9.8 and Adelaide at 9.7.

So, what fuelled this dramatic shift?

Supply and demand

At its core, the answer lies in the interplay between supply and demand. On the demand side, Australia has seen significant population growth. This has meant a need for more places for people to live. But, this growth has not been matched by an increase in housing supply.

Red tape, slow building approvals, labour shortages and the cost of building materials have all combined to slow down the pace of delivery of new homes. This sluggish supply, coupled with strong demand, has pushed prices ever higher.

Population density

There are other reasons Australia’s housing market is under such strain, including how the population has grown.

Australians are highly concentrated in major cities, with Melbourne and Sydney dominating. For example, in 2022-23 the Australian Bureau of Statistics (ABS) reported that there were 38,400 people living per square kilometre in Melbourne’s CBD, compared to just 8,600 people in Brisbane’s most densely populated area.

This demand for urban living puts a premium on already limited space. With most of the population concentrated in coastal areas, there’s simply less land available to build new houses on, driving up the price of existing properties, particularly those close to amenities and jobs.

This has increased housing competition, worsening the affordability crisis.

Shifting demographics

Another reason prices are shifting is down to the types of households Australians live in. Traditionally, we lived in larger households with more people. Today, smaller families and single-person dwellings are more common. The country’s population of 27 million live in 11 million households with the size of households shrinking from 2.8 in the mid-1980s to around 2.5 today, according to the ABS and Reserve Bank of Australia.

This means that while the overall population increases, the number of housing units required grows even faster.

What can be done?

Addressing the affordability crisis requires a multi-pronged approach.

Red tape around building approvals needs to be reduced to speed up the development process. Streamlining the process for approval could reduce these delays and make housing construction more efficient.

The federal government’s budget for 2024-25 includes a focus on housing, including $89 million towards fee-free training for construction workforce training, supporting 20,000 new positions. The hope is that this will help address labour shortages in the construction industry.

Other aspects in the budget that may help include $1 billion to states and territories to build infrastructure for new housing. This includes things like water, power, sewage and roads.

Given the country’s population density challenges, investing in infrastructure that supports higher-density living is crucial.