Op-ed: Australia needs to build smarter to tackle its housing crisis

The re-elected Albanese Government has rightly named productivity and housing as two of the top priorities of its second term. 

With its thumping new majority, the Federal Government must do all it can – and encourage state and local governments – to undertake major reform to tackle these challenges. 

One way we can address both at the same time is to get serious on lifting Australia’s woeful levels of construction productivity.

Productivity means producing more of something with the same or fewer resources. It’s about working smarter, not harder.  

In the construction sector, it’s been flat for nearly 30 years, while it grew by 23 per cent in manufacturing and almost 20 per cent in the overall market sector over the same period.  

To show how serious the problem is, we’ve found Australia is building half as many homes per construction worker as in the 1970s. That’s despite half a century of development in building technology and materials. 

While many factors are dragging down construction productivity, a critical contributor is the dominance of very small businesses. 

We’ve found 98.5 per cent of Australian construction companies have fewer than 20 employees. Smaller firms are less productive than bigger firms because they can’t achieve the same productivity gains from innovation, investment and economies of scale.  

Using previously unpublished data from the Australian Bureau of Statistics (ABS), we also found building companies with 200 or more employees generate 86 per cent more revenue per worker than those with 5 to 19 employees.  

In other words, construction workers create more revenue per worker in bigger firms. 

While we are unable to measure firm-level productivity directly, revenue per employee is a reasonable proxy for labour productivity. 

That means the construction sector could generate an extra 12 per cent or $54 billion in revenue per year without needing any more workers if Australia’s building firms were similar in size to our manufacturing firms. 

That’s equivalent to gaining an extra 150,000 construction workers – a significant boost at a time of labour shortages. 

The dominance of small firms is the result of the cyclical and segmented nature of the building industry, combined with a shift to subcontracting that started in the early 1980s.  

But current regulations are encouraging builders to stay small.  

Tax incentives favour independent contractors, who are more likely to disclose income under the tax-free threshold than salaried construction workers. 

Other tax settings, such as the instant asset write-off, also favour smaller companies.  

Australia also has the most decentralised system of land-use regulation in the OECD, which makes it harder for builders to grow and expand into new areas.  

For example, the development application to build a three-storey block of apartments in Sydney in 1967 was 12 pages long. Today, an equivalent building would require extensive assessments, making applications hundreds if not thousands of pages long.  

Experience in New Zealand suggests reducing these regulations can help to boost productivity. Starting in 2016, there was an overhaul of zoning restrictions in Auckland that allowed higher-density development across the city.  

This more than tripled home-building approvals within six years and coincided with a big jump in New Zealand’s construction productivity. 

Australia has not built enough homes to keep up with demand. Sydney is now the second most expensive housing market in the world, while Adelaide is sixth and Melbourne is ninth. 

This world-leading unaffordability has hit younger Australians, lower income earners and renters particularly hard. 

All levels of government must tackle this housing crisis. While some are finally taking action, nowhere near enough has been done. 

To help us build smarter, not just harder, we need to take a range of measures including: 

• Streamlining land-use regulation across all levels of government, including planning and zoning laws and subdivision regulations; 
• Adjusting the relative tax rates and settings for individuals and small and large businesses as part of broader reform of the entire tax system; and  
• Governments can reduce volatility by creating a more predictable pipeline of work, such as through their social housing and infrastructure programs.

With the election in the rearview mirror, a Labor government with a huge and unexpected majority, and most state governments of the same political stripe, we must focus on policies to lift productivity in construction alongside measures to increase housing supply. 

We should ensure that basic policy foundations such as regulations and tax don’t stand in the way of targeted measures to build more homes.   

Do we really want to create a future in which today’s young Australians may never be able to own their own home?