Over the past few years, the demand for small, reasonably priced homes has surged as rising property prices and high interest rates limit what first-time buyers can afford.

The shortage of established properties on the market has prompted many buyers to explore the new homes market for more options.

Decreasing supply of small, affordable homes

Despite high demand, the construction of one- and two-bedroom apartments, as well as two- and three-bedroom houses, have been decreasing and being replaced with more new developments falling into higher price categories, such as four- and five-bed houses and three- and four-bed apartments.

The proportion of new apartment listings under $800,000 has been decreasing, down 10% compared to 2023 and 26% compared to 2022.

Source: realestate.com.au

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Conversely, listings priced at $800,000 and above have grown by 8% compared to 2023 and 30% since 2022. This trend towards high-end apartments rather than smaller, entry-level properties is evident, especially with more apartment listings now priced at $2 million or more.

Currently, 40% of apartment listings are priced below $800,000, but 62% of enquiries are for apartments in this price range.

In the past year, enquiries for apartments over $800,000 have fallen by 5%, while those for lower-priced properties have increased.

There has also been a decrease in houses of $800,000 and below over the past two years, but enquiries have been increasing.

An increase in listings for houses above $800,000 has been observed; however, enquiries have dropped slightly.

Source: realestate.com.au

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The disparity between available properties and buyer preferences is even more pronounced when considering the number of bedrooms.

Nearly 40% of apartment enquiries are for one-bedroom properties, yet only 17% of listings account for this type of home, and their numbers have been declining year-on-year.

Source: realestate.com.au

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Similarly, new house developments are trending towards properties with more bedrooms.

Whereas many established houses were built with just two bedrooms, the majority of houses now have four bedrooms.

Even the construction of three-bed homes is decreasing, and this is making them more in-demand.

Source: realestate.com.au

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Construction constraints

The main reason for the reduction in small apartments and houses is the increasing expense of building new dwellings, diminishing profit margins on smaller properties.

The increase in the cost of building materials is a large contributor, with the input to house construction prices increasing by a third since the start of the pandemic.

And although material prices are not increasing as much as during 2022 they are at an all-time high, making the cost of building that much higher.

This escalating cost of construction presents a significant challenge to the Government's goal of building 1.2 million homes by 2029, many of which are intended to be affordable housing.

Additionally, a shortage of skilled workers is delaying the approval and construction of new builds, creating a backlog that costs construction companies both time and money.

In July 2024, the total dwelling units approved increased by 10% month-on-month and 14% year-on-year, marking a positive start to the Government's Housing Accord. However, this progress is already falling short of the monthly approvals needed to meet the 1.2 million dwellings target by 2029.

To reach this goal in the next five years, monthly approvals need to hit 20,000, but in July, the number was 5,000 short, with the average monthly approvals over the past year remaining below 14,000.

Looking ahead

The rising demand for small, affordable homes contrasts sharply with what is on the market, as high construction costs and a focus on higher-priced developments limit the availability of budget-friendly options.

The discrepancy is further exacerbated by the increased cost of building materials and a shortage of skilled labour, challenging the Government's ambitious housing targets.

Although there are some positive signs in housing approvals, the current pace is insufficient to meet the projected targets, underscoring the need for further measures to address both the supply and affordability of housing.

Want to explore new properties? Browse our dedicated New Homes section.