Introduction

The idea that Australia’s soaring property prices are caused by “not building enough” is one of the most confidently repeated claims in the housing conversation. It sounds logical, it sounds simple, and it gets thrown around every time prices surge.

But here’s the truth: that explanation is far too neat for something as complex as the Australian property market.

Yes—supply matters.

Yes—we do need more homes.

But the relationship between building activity and price movements isn’t as straightforward as some like to claim. And when you dig into the numbers, the charts, and the behaviour of real buyers in real suburbs, the “undersupply myth” argument starts to fall apart.

Here we’re breaking down why. As always, we’ll keep things practical, evidence-based, and grounded in how the market behaves on the ground—not just in national graphs.

Why the “Undersupply Myth” Argument Fails

It treats Australia as one market (it isn’t)

Australia isn’t one housing market. It’s hundreds of micro-markets, each with its own supply constraints, demand patterns, incomes, zoning laws, infrastructure, and buyer behaviour.

National charts cannot explain price movements in Brisbane, Adelaide, Perth, or the Hunter.

Local undersupply absolutely does affect local prices—and this is where buyers actually compete.

It Only Looks at Detached Houses

Detached house commencements are only one part of the supply picture. Units, townhouses, land releases, demolitions, and long-term infill capacity all shape supply.

Omitting these creates a distorted picture that doesn’t reflect real housing availability.

It Confuses Correlation with Causation

More building tends to happen during booms because demand is already high—not the other way around. When confidence rises, rates fall, and buyers flood back into the market, builders respond.

Construction activity follows demand, not vice versa.

It Ignores Lag Time

Approvals today may not become actual homes for two to three years.
Comparing annual commencements with annual price changes misses this entirely.

It Overlooks Structural Undersupply vs Annual Supply

Short-term commencements don’t measure whether we have enough homes to house our population.

Planning restrictions, zoning, land release programs, and migration flows all matter far more than commencements alone.

The Parts That get Left Out

New Builds Are (historically) More Expensive—and They Set the Anchor

Historically, new builds cost more than established houses. They reflect modern standards, materials, builder margins, and today’s elevated construction costs. This has changed recently where almost the opposite is true. However, higher new-build prices lift established home values over time, because buyers always compare: – “What can I get established?” with – “What can I get brand new?”

When the premium rises, the middle follows.

Established Homes Are Extremely Scarce

Listings are at multi-decade lows in many markets. Owners aren’t moving, downsizers can’t find suitable stock, and investors are holding longer.
When the established market is this tight, even small demand shifts push prices up quickly.

If new supply collapses, pressure shifts back to the already-scarce established stock.

Demand Matters—Massively

This is the missing link.

Prices rise when:

– migration surges
– household formation climbs
– borrowing capacity expands
– confidence returns
– rents spike
– supply cannot respond fast enough

Even modest supply constraints can trigger significant price pressure when demand is strong.

This is exactly what we see in Brisbane, Adelaide, Perth, parts of Sydney, and regional hotspots.

So What Actually Drives Prices?

It’s a combination of: – strong, sustained demand
– not enough established homes for sale
– expensive new builds that anchor values higher
– zoning and land restrictions
– migration surges
– very low vacancy rates
– localised supply shortages
– interest rate cycles

National new-build numbers barely scratch the surface.

The “undersupply myth” argument tries to simplify something that isn’t simple. Is undersupply the only reason prices rise? No. Is it irrelevant? Absolutely not.

Prices move because of a complex interaction between demand, local supply constraints, borrowing power, rental conditions, market sentiment, and the cost of producing new homes.

And right now, Australia has:

– historically high demand,
– historically low listings, and
– a new-build sector that can’t keep pace.

That combination will always support upward price pressure—myth or no myth.