Why Anthony Albanese's ambitious housing plan could cause a financial crisis

Anthony Albanese's plan to build 1.2million homes from this week could spark an insolvency crisis in coming years, an expert fears.

Australia has a housing crisis as building approvals lag well behind immigration-fuelled population growth.

Local councils and state governments approved just 163,759 new homes in the year to May, new Australian Bureau of Statistics data showed.

But this was well short of Labor's target of 240,000 a year over five years, starting on July 1, as part of the prime minister's goal of building 1.2million homes.

Matthew Caddy, a Melbourne-based partner at McGrathNicol with more than 25 years' experience handling corporate insolvencies, said artificially boosting apartment building was more likely to spark an insolvency crisis in coming years.

'If the government's focused on any particular area, at any particular time, that can lead to a spike but we also see, off the back of those spikes, usually they're not well managed on the other side,' he told Daily Mail Australia.

'You bring forward demand and you're creating an artificial demand at times - on the other side of that, it's not uncommon that you then see an abnormal amount of insolvencies.'

The low level of building approvals has also occurred as 487,820 migrants moved to Australia in the year to April, leaving a shortfall of 78,422 homes - a figure based on households having 2.5 people on average.

Despite the housing shortage, apartment developers in particular are struggling, with construction companies now making up more than a quarter of Australia's failed companies.

'Many project feasibilities aren't profitable which has led to a slowdown in construction activity,' Mr Caddy said.

'More of the construction insolvencies relate to higher density construction projects rather than land and building developments.

'In those projects, there's very skinny margins and when there's reduced demand, then everyone's competing for what is available and that drives margins down further.'  

Housing Minister Julie Collins argued building more homes was the best way to plan for population growth.

'Building more homes is the best way to address Australia's housing challenges,' she said.

The federal government pledged $3billion for the states and territories to help meet the target building 1.2million homes over the five years to 2029.

Mr Caddy was critical of both sides of politics, noting former prime minister Scott Morrison's HomeBuilder scheme, giving out $25,000 grants during the pandemic in 2020, had also caused an uptick in construction insolvencies as building costs surged. 

'You saw all the pressure in the home building market, post Covid, where the builders had gone out and signed record numbers of forward contracts off the back of government grants,' he said.

'Those prices were fixed and then suddenly, the home builders were struggling to build those homes because they weren't getting built at a profit.'  

While Australia has a housing shortage, Australians increasingly want to live in a house with a backyard instead of a cramped, high-rise apartment.

'At the customer level, in terms of the buyer demand, that's somewhat subdued,' Mr Caddy said.

While investors had traditionally favoured one and two-bedroom units, they have been lukewarm on larger, three-bedroom apartments. 

'Many apartment buildings are built as investment stock - one bedroom apartments, two-bedroom apartments,' Mr Caddy said.

'Lots of apartment complexes were going up that were focused more on owner-occupier, downsizers and they were focused more on selling to the three-bedroom market which isn't strong at all for investors and then the demand for those, certainly over the last 24 months, has fallen away significantly.'

Construction was by far Australia's worst affected sector with 2,832 businesses going into administration in the year to June 16 - a 33.7 per cent surge, Australian Securities and Investments Commission data showed.

Fixed-price contracts and higher building material costs are crippling builders, despite Australia having a housing shortage following record-high immigration.