What the 2026 Federal Budget should focus on to fix housing

As we approach this year’s federal budget, the focus needs to be on policies that genuinely improve housing outcomes, rather than those that risk making affordability pressures worse.

Housing affordability remains one of the most significant economic challenges facing Australia, but it is often approached through the wrong lens. The evidence is clear that affordability is not primarily driven by short-term policy interventions - it is driven by the ability to deliver housing at scale.

Too often, policy responses focus on stimulating demand or redistributing existing housing, rather than addressing the underlying constraints that limit supply. 

In a market where supply is already constrained, these approaches can have unintended consequences, pushing up prices or shifting pressure onto renters.

The priority for the federal budget should be to avoid making these pressures worse, while supporting a more functional housing system - one that makes better use of existing stock, protects rental supply, and improves the industry’s ability to deliver new housing.

The following priorities focus on practical, evidence-based measures that align with how the housing market actually operates.

1. Don’t worsen rental supply through tax changes

Australia’s rental market relies heavily on small, private investors, and there is no immediate alternative if that supply is reduced. When investor participation falls, rental supply contracts quickly - and that pressure shows up almost immediately in higher rents and reduced availability.

The key issue is that while policy can reduce investor activity quickly, it cannot replace that rental supply at the same pace.

We don’t have a backup system for rental housing - so policy needs to be careful not to reduce it further.

2. Remove tax distortions that discourage downsizing

A significant share of Australia’s housing stock is underutilised, with larger homes often occupied by smaller households. At the same time, younger families face constraints accessing appropriate housing.

Part of this comes down to financial and tax settings that make it easier to stay in place than to move. This reduces turnover and limits how effectively existing housing is used.

Improving mobility within the housing system - including through settings like the super scheme - can help unlock existing capacity without needing to build new homes.

3. Avoid demand-side support in constrained markets

Policies that increase purchasing power, such as first home buyer incentives, tend to be capitalised into prices when supply is limited.

This is particularly evident at the lower end of the market, where demand has been strongest and price growth has been most pronounced. 

While these policies can help some buyers in the short term, they ultimately make housing less affordable overall.

In a supply-constrained market, increasing demand does not improve affordability - it pushes prices higher.

4. Support construction capacity and productivity

One of the key constraints right now is not just approvals - it’s the ability to deliver housing at scale.

Construction costs remain high, labour is constrained, and many projects are not proceeding because they are not financially viable. There are also inefficiencies in the system, including skilled workers who are ready to work but face delays due to slow skills recognition processes, and limited adoption of faster, lower-cost construction methods.

If we want supply to respond, we need to ensure the industry has the capacity and productivity to actually build.

The common thread across all of these is that housing outcomes are being driven by supply constraints. The budget should focus on expanding capacity and improving delivery - not just redistributing demand.