As the May 3 federal election approaches, housing has suddenly emerged as a battleground issue with both major parties unveiling significant policy packages aimed at first home buyers. After months where housing affordability appeared to be taking a back seat, announcements over the weekend have thrust the issue to the forefront of the campaign.

Labor's plan will allow all first home buyers to purchase with just a five per cent deposit, with the government guaranteeing the remaining amount needed to avoid lenders' mortgage insurance. They've also committed $10 billion to build 100,000 homes exclusively for first home buyers, as part of their broader 1.2 million new homes target

The Coalition's plan would allow first home buyers of newly built homes to deduct mortgage interest on loans up to $650,000 from their income tax - worth approximately $11,000 yearly for the average family, or $55,000 over five years. They've also proposed a $5 billion infrastructure fund to unlock land and enable construction of 500,000 new homes.

Deposit hurdles vs. ongoing costs

Labor's approach tackles the initial deposit hurdle. Currently, about 50,000 Australians annually access an income-capped version of this scheme, but the government expects this to increase to around 80,000 under the expanded program. The scheme removes the need for lenders' mortgage insurance, potentially saving first home buyers tens of thousands of dollars upfront. This would apply to both established and new homes, with price caps still in place.

The Coalition's plan instead focuses on reducing ongoing mortgage costs through tax deductions, but only for newly built properties. Their strategy aims to incentivise new construction by providing substantial tax benefits to those willing to purchase new homes.

Supply and demand imbalance

The fundamental issue in housing affordability is the balance between supply and demand, and each party's policy addresses this differently.

Labor's deposit guarantee scheme will certainly be popular but risks further inflating property prices by increasing buyer capacity without adequately addressing supply constraints. The Productivity Commission's research on first home buyer incentives consistently shows that measures increasing purchasing power often lead to price increases in the targeted market segments.

The Coalition's approach more directly targets supply by limiting benefits to newly constructed homes and focusing on infrastructure investment to unlock development opportunities. This addresses one of the biggest challenges in housing development - the high infrastructure charges and regulatory barriers associated with releasing new residential land.

House price growth and the supply gap

Adding context to the affordability crisis is Australia's remarkable housing "super cycle." Data from Ray White shows that in the last 20 years, the largest price drop experienced nationwide has been just five per cent, with prices otherwise continuously climbing. There has been limited success broadly in achieving affordability.

Australia faces a growing supply deficit that has been compounding since 2007 – the last time the country built enough homes to meet demand. According to research undertaken by the Forest & Wood Products Australia (FWPA), last year Australia built 45,700 homes but needed 57,300, adding to a cumulative deficit now approaching 500,000 dwellings. The government's ambitious target of 1.2 million new homes over five years represents an unprecedented construction challenge, as Australia has never achieved this volume in any five-year period. The last time it was achieved was last decade at a time when we had unprecedented levels of foreign capital financing the development of close to 1.1 million homes - surprisingly, both parties are looking at measures to further limit foreign investment despite this previous success.

Construction industry headwinds

Both policies face significant headwinds from Australia's construction industry realities. Building costs have been outpacing house price growth, making it more affordable in most parts of Australia to buy an existing home than purchase a new one. This cost pressure undermines policies aimed at encouraging new construction.

Construction challenges have worsened, with industry insolvencies continuing to rise and now exceeding 1,200 annually. Labor productivity remains low, and the average time to complete a house has increased from approximately 6.5 months pre-pandemic to over 10 months today. These factors severely limit the industry's capacity to deliver on ambitious housing targets.

The Labor government's ambitious 1.2 million homes target under the National Housing Accord is already well behind schedule. The target was increased to 1.2 million from the original 1 million homes after National Cabinet discussions in August 2023, but delivery has fallen significantly short. The target is the right one, based on the FWPA research, but the ability for the Government to influence supply is limited.

Demographic shifts and housing mismatch

Neither proposal fully addresses Australia's deeper structural housing challenges. The mismatch between our housing stock and demographic needs continues to grow. Four-bedroom homes have seen the strongest growth in construction, while average household size shrinks (from 2.6 to 2.5 people per household) and single-person households increase.

This demographic shift is creating an urgent need for smaller dwellings, yet most Australian housing is designed for larger households. Compared to international cities, Australian urban areas remain remarkably low-density, with units comprising just 46.2 per cent of Sydney's dwellings and 34.6 per cent of Melbourne's, compared to over 90 per cent in cities like London and Singapore. This "missing middle" housing is crucial for addressing affordability while accommodating changing household compositions.

Many older Australians remain in large family homes, unable or unwilling to downsize, keeping valuable housing stock off the market. Data shows that 75.4 per cent of couple-only households have two or more spare bedrooms, representing significant underutilization of existing housing stock.

Voter appeal vs. long-term solutions

Labor's policy will likely have broader appeal simply because it applies to both established and new homes. For most first home buyers, particularly in major cities, an established property is a more realistic entry point to the market.

The Coalition's interest deduction scheme mirrors aspects of the popular HomeBuilder program, restricting benefits to new builds, limiting its immediate voter appeal despite potentially doing more to address supply constraints.

Conclusion

Solving Australia's housing affordability crisis requires a combination of approaches - boosting supply, addressing tax incentives that distort the market, tackling construction costs, and dealing with the mismatch between our housing stock and demographic needs.

As voters consider these proposals ahead of May 3, they'll need to weigh immediate personal benefit against the longer-term structural reforms needed to make housing more affordable for future generations. With interest rates beginning to ease and markets pricing in further cuts, the question remains whether either party's policies can meaningfully address the deep-rooted supply issues and demographic shifts shaping Australia's housing future.