TOL - 15th May, 2026
The budget will not fix housing. It might make it worse
The housing crisis is going to get worse before it gets better, with budget measures delivered at the worst possible time.
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The RBA had little option last week but to raise interest rates. As this decision reverberates throughout the economy, Australians will become hyper-focused on inflation, interest rates, and whether we are already in recession. The economy has already been contracting, so why would the RBA inflict more pain on mortgage holders?
Because it has no choice. Eight of nine board members voted to raise rates. Inflation was gaining momentum well before the Middle East crisis erupted, and the threat is now compounding.
“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” — Ronald Reagan
Looking back through economic history, unanchored inflation is not something to be taken lightly. It will steal your money while you sleep, and if left unaddressed, it will worsen and prolong economic pain far beyond the initial shock. Monetary policy alone cannot fix this. The economy needs fiscal policy to be reined in. This budget may be one of the most consequential in our economic history and many economists understand we are on a knife-edge, and the decisions made in the next few weeks will echo for a decade.
Housing inflation: the engine driving the crisis
Housing inflation has averaged 6% over the past twelve months – the single largest contributor to overall CPI. The only ways to reduce pressure are to increase supply through new construction or to reduce demand through lower migration and tax reform. But neither addresses the existing shortage of approximately 400,000 dwellings. And the unintended consequence of tax incentives will remove investment properties from the rental pool, resulting in higher rents, which feed directly back into inflation.
Chart: Australia CPI inflation by component | Quarterly data Mar 2023 – Mar 2026
The 2024 CPI trough was largely an illusion— created by government electricity and fuel rebates masking underlying inflation. The trimmed mean never fell below 3.4%, and housing never entered the RBA target band. The re-acceleration in 2025–26 reflects rebate expiry plus the Middle East energy shock, with the underlying problem — a structural housing supply deficit — unresolved throughout.
CPI Peak
7.8% |
CPI Trough (Aug 24)
2.7% |
CPI Now (Mar 26)
4.6% |
Trimmed mean
3.3% |
Source: ABS Consumer Price Index, Cat. 6401.0 / 6484.0 · RBA target band 2–3%
Collateral damage already felt in property
With 67% of Australian household wealth held in property, and the sector contributing 10.6% to national GDP, it is both the heart and engine room of the economy. Price instability here is not a sector-specific problem it is a systemic risk.
We are already seeing negative price movements in Melbourne and Sydney. Property data lags two to three months, but a leading indicator — the auction clearance rate — has sat between 50% and 60% for several weeks, signalling weakness. Reduced borrowing capacity, increased investor hesitancy, and negative sentiment are compounding. In certain market segments, we are already seeing price corrections of 10%.
Mistakenly, people believe that mining is the single most important growth sector. When it comes to employment and related businesses, it is by far the biggest contributor, as the table below shows.
Table: The property sector pays more tax than the mining sector while affecting more Australian jobs
| Feature | Property industry | Mining industry |
| Direct GDP Contribution | ~10.6% | ~ 14.3% |
| Total GDP (incl. flow on) | ~13-15% | ~ 15-18% |
| Direct employment | ~1.4 million | ~300,000 |
| Export share | Minimal | 70% |
| Tax contribution | ~ 129.6 billion | ~ 74 billion incl royalties |
We are not building enough
According to the National Housing Accord, Australia needs to build 240,000 dwellings each year. Despite approvals trending upward, the pipeline from approval to delivery remains long. State governments have reduced some red tape, and gains have been made — but for developers, the conditions required to commence a project profitably — market stability, accessible labour, and available capital — are deteriorating simultaneously.
We are not close to bridging the supply gap of roughly 66,000 dwellings per year. That gap compounds the inflationary problem every year it persists. Critically, the chart above reveals a story that approvals data alone conceals: the gap between approvals and completions has widened sharply. Approvals are recovering toward 200,000 — but completions are running at 174,000 and declining. An approval that never becomes a completed home does nothing to address supply or inflation.
Chart: 12 month dwelling approvals and completions – National vs NSW
|
National Approvals recovering but volatile ~200,000 |
National Completions 27% below target ~174,000 |
NSW Approvals improving off low base ~68,000 |
NSW Completions 28% below target ~55,000 |
Source: ABS Building Approvals (8731.0) & Building Activity (8752.0)· NHSAC State of the Housing System 2026. Accord began July 2024. Shaded area = Accord period. Post-2026 projections based on NHSAC 2026 base case. Completions derived from ABS Building Activity quarterly rolling 12-month totals.
The triple blow: construction inflation, tax intervention and the wealth effect
Allowing the housing crisis to worsen over decades has dealt a triple blow to the economy, and the problem is self-perpetuating as long as supply does not exceed demand.
The building paradox is stark: demand for property has never been higher, yet fewer and fewer projects will commence. Construction inflation is surging. Supply chain disruptions from the Middle East conflict are worsening. Builders are increasingly unwilling to carry contract risk. The cost of capital is rising. And with property values under pressure, project feasibility is deteriorating from both sides of the ledger.
Construction cost inflation is trending at 4.2%, double the pre-COVID average of 2%, and the Middle East energy shock threatens to push that figure toward 10%, conservatively eliminating a further 10,000–33,000 homes from the pipeline by 2029, according to the NHSAC State of the Housing System 2026.
This is not merely a pricing problem. Speaking to builders directly, the concern is not only cost increases — it is supplying chain breakdown, with significant delays in key materials already threatening project completions. Builders are now hesitating to commit to major projects when input costs are this uncertain. Force majeure clauses are appearing in construction contracts, shifting risk away from builders and onto developers and lenders. This is a fundamental reshaping of the lending landscape — and it is happening in real time.
EXPERT VIEW — Peter Paradise, Construction Lawyer, Paradise Charnock Hing
“We are seeing several force majeure claims under existing contracts, and new contracts are incorporating what we call an ‘Exceptional Event Clause’ covering cost increases caused by the fuel crisis and geopolitical instability.
Dispute work in the construction sector has increased. Developers are dealing with more post-completion defects caused by mid-cycle cost-cutting. The Building Commissioner has been more active, and multi-residential has seen significant delays and buildings not built to code.”
The budget will make each of these problems worse
The government faces a choice it has been avoiding for two decades: address the structural supply shortage with genuine reform, or continue tinkering with demand-side tax measures that will make the problem worse. Abolishing negative gearing and reducing the CGT discount will remove private capital from the rental market, shrink supply, push rents higher, and feed the very inflation the RBA is being asked to kill with rate rises.
I also appreciate the flip side of the argument that baby boomers have all generated vast wealth from property, perhaps fuelled by a property-centric tax system, making property unaffordable to the younger generation. I do not see Robin Hood policies can reverse decades of structural change.
We are in the middle of a self-reinforcing crisis. The RBA raises rates to fight inflation. Higher rates reduce project feasibility. Fewer projects commence. Supply falls further. Rents rise. Housing inflation stays elevated. The RBA raises rates again.
The only exit from this loop is supply. Not tax redistribution. Not rate hikes. Supply.
And the conditions for delivering it — stable costs, available labour, accessible finance, and investor confidence — are all moving in the wrong direction at the same time. The budget will make each of them worse.
Australia has been here before. In 1985, negative gearing was abolished. Rents spiked, supply contracted, and the policy was reversed within two years. We appear determined to learn nothing from that lesson.
The RBA cannot build houses. Monetary policy cannot reduce construction costs or speed up planning approvals. What it can do and is doing is raise the cost of capital until something breaks. What breaks first is usually the most leveraged, the most exposed, and the least able to adapt. In the current environment, that is the development pipeline.
When the development pipeline contracts further, the housing shortage deepens, rents rise, inflation persists, and the rate cycle continues. The path out of this requires political courage the current budget does not appear to contain: a genuine commitment to supply, to density, to reducing the cost and time of construction, and to keeping private capital in the rental market rather than driving it out.
Until that commitment is made, the housing crisis will continue to worsen — and with it, the broader economic pain it inflicts on every Australian who does not already own a home.
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Paul Miron oversees portfolio construction and investor relationship management at Msquared Capital. He draws on almost 30 years’ experience as a broker and banker, structuring complex transactions for high-net-worth borrowers. He previously held senior roles at Colonial State Bank and Westpac.
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Msquared Capital Pty Ltd ACN 622 507 297 AFSL 520293. Information contained in this article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. It does not constitute personal financial product advice, investment advice or a recommendation. Before making any investment decision, you should consider whether the information is appropriate to your circumstances and seek independent financial advice. Property and private credit investments carry risks, including market downturns and borrower defaults, and neither past performance nor security over property guarantees future returns or capital protection.
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Paul Miron oversees portfolio construction and investor relationship management at Msquared Capital. He draws on almost 30 years’ experience as a broker and banker, structuring complex transactions for high-net-worth borrowers. He previously held...
Expertise
Paul Miron oversees portfolio construction and investor relationship management at Msquared Capital. He draws on almost 30 years’ experience as a broker and banker, structuring complex transactions for high-net-worth borrowers. He previously held...
Expertise
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