The number of homes commencing construction in Australia is set to increase over the next few years driven by factors including strong population growth, low unemployment and falling interest rates.

However, the latest outlook from the Housing Industry Association (HIA) says that long-term structural issues continue to pose risks to housing affordability with national supply targets not being addressed.

Overall though, the sector is showing signs of improved confidence following a period of weak activity, HIA Chief Economist Tim Reardon said.

“We expect new home commencements to increase steadily through the second half of the decade,” Mr Reardon said.

“Detached house building will lead this recovery, peaking in 2027, with apartment construction set to follow as market conditions and policy settings improve.”

Recent interest rate cuts and historically-strong migration are adding to demand for new housing.

But ongoing constraints including land shortages, regulations and taxes are increasing the cost of construction and limiting supply. This will continue to drive up the cost of both renting and buying a home.

“The only way to close the growing gap between supply and demand is through meaningful reform, particularly at the state level.”

The HIA report forecasts that home building will fall 20 per cent short of the Australian Government’s target of 1.2 million new homes over the five years.

“We need to unlock land, streamline planning processes, and remove barriers to investment if we are to meet the housing needs of a growing population,” Mr Reardon said.

“Australia has the capacity to deliver, but it will take a coordinated response from all three tiers of government to overcome these constraints.”

While detached housing is showing strong growth in some states, activity remains subdued in NSW, he said.

“Housing demand is not going to decline with a rise in interest rates. It is continuing to grow, along with the population. Structural reforms are needed now to shape affordability, economic opportunity and living standards for the next generation,” Mr Reardon concluded.

According to the latest statistics, there were 26,880 detached houses that commenced construction in the December quarter 2024, which brought the 2024 calendar year to 107,240 detached starts, up by 7 per cent compared to the previous year.

This increase is expected to continue with a further 3.7 per cent in 2025 to 111,240, and 6.7 per cent increase in 2026 to 118,660 and to a peak in 2027 of 120,910 starts.

However, detached starts are then expected to fall – to 108,240 in 2030 – as the cost of land and rising borrowing and construction costs see households shift demand to unit construction.