The market for new home construction in Victoria is set to remain sluggish across 2026 as the state continues to lag the nation in terms of the new home building recovery, an industry breakfast has heard.

During an address at the Victorian session of the State of the Nation industry breakfast that was hosted in Melbourne by Housing Industry Association (HIA) on March 4, HIA chief economist Tim Reardon provided an overview of current market conditions and the forward outlook for new home building across both Victoria and Australia.

At a national level, Reardon expects the number of dwelling commencements to continue to rise across 2026 and beyond as increasing momentum in the apartment sector supports healthy activity levels in detach house construction (see chart).

In Victoria, however, conditions are expected to remain subdued, with relatively flat activity levels in the detached house sector accompanied by modest growth only in multi-residential construction (see chart).

To be sure, Reardon acknowledges that Victoria is currently building more homes on a per-capita basis compared with any other state or territory.

And he acknowledges that the recent ‘trough’ in new home building commencements in Victoria has been shallow.

Nevertheless, he expects 2026 to continue to be a slog across the state before new home starts begin to gradually recover in 2027.

“We are looking for an increase in detached housing starts (in Victoria) over the next couple of years, but not alarming growth,” Reardon said.

“This is very slow, modest growth coming out of what is a reasonably shallow trough battling against higher interest rates.

“There is a scenario for Victoria which is this year is going to be a battle. It is likely that this year will see that same slow volume of housing commencements (as has occurred in recent years).”

(Note: Reardon’s comments came around one week after the start of the Iran War on February 28 and reflect the geopolitical situation as at the time his comments were made on March 4.

In terms of home building activity, Reardon does not expect the war to be a major factor over the next couple of years unless things change dramatically. He said that the oil price shock was likely to be one of the smaller oil price shocks relative to the past two decades and would have less of a home building impact compared with the supply-side shock that occurred after COVID.

The comments also predate the latest 0.25 percent increase in official interest rates which took place on March 18. At the time of his presentation, Reardon predicted that the March rate rise would occur and that one further increase to interest rates was likely over the course of this year.)

(quarterly forecast of housing commencements – national)

Gradual national recovery

At a national level, HIA expects the number of new dwelling commencements to rise steadily over coming years (see chart).

This will occur as detached home starts continue to rise before peaking on account of land constraints in 2028 whilst a stronger recovery will continue to take hold in the previously subdued multi-unit segment of the market.

Over the next five years, Reardon sees an interesting scenario whereby new home commencements continue to rise even as interest rates rise.

This will occur on account of government stimulus along with ongoing population growth and continued strong employment conditions.

In terms of interest rates, Reardon acknowledges that the beginning of the upward cycle has come through sooner than expected.

This occurred after the first 0.25 percent increase in official interest rates in February was followed by a further 0.25 percent increase in March. (Whilst Reardon’s presentation predates the March increase, he indicated during his presentation that he expected a further increase to occur in either March or May.)

Previously, HIA had not expected the upward cycle in official interest rates to begin until around the middle of next year or even into 2028.

However, Reardon says that the current cycle of interest rate increases will be different to normal monetary policy cycles.

Typically, regular interest rate cycles involve between four and six increases or decreases. Under normal scenarios, this begins to be reflected in higher or lower building commencements after around twelve months, and the number of starts is typically higher or lower by around 25 percent after two years.

In the current cycle, however, Reardon expects the acceleration in rates to be slower and more gradual.

Following the March increase (which as mentioned above came through on March 18th), he expects one further increase in 2026 followed by progressive increases across the remainder of the decade driven by population growth and government spending.

This will see the official cash rate land somewhere between five and seven percent by 2030.

In terms of impacts, the earlier than expected rate rises have not altered HIA’s overall expectation of housing starts over coming years but have pushed out its expectation of the timing of the new housing recovery.

This will see a recovery in new home building that will be longer and more gradual compared with previous expectations. As a result, the expected peak in detached home building commencements has been pushed back from 2027 until 2028.

Despite the expected rise in interest rates, Reardon says that the recovery in new home construction will continue on account of ongoing population growth and continued labour market strength.

In terms of the former issue, Reardon expects the national population to continue to rise from around 27 million now to reach around 30 million by 2030.

In terms of the labour market, he expects unemployment to remain low notwithstanding that economic growth is likely to remain subdued.

Combined, these two factors will help to underpin both demand for new homes and household capacity and willingness to finance new home purchases and construction.

Meanwhile, in the multi-unit segment, the outlook has received a significant policy boost as a result of the NSW Government’s Pre-Sale Finance Guarantee Scheme, under which the NSW Government has committed to purchase up to 50 percent of dwellings in qualifying off-the-plan residential developments.

This is expected to assist developers to secure lenders’ approval regarding finance and to commence construction more quickly.

Whilst there is no guarantee that similar programs will be adopted elsewhere, Reardon notes that some other states/territories are looking closely at this.

The expectation of growing activity is supported by recent data.

At a national level, both new home sales and building approvals have grown steadily over the past twelve months.

Victoria lagging

As mentioned above, however, Victoria is lagging the rest of the nation.

As a result, home building conditions across the state are expected to remain subdued across 2026.

As noted above, Victoria is currently delivering more homes on a per capita basis compared with any other state. This means that the state’s performance in delivering new housing relative to its population has held up quite well over recent years.

For builders, however, the softness in market conditions means that home building conditions are set to remain difficult for some time.

At its core, Reardon says that the reasons behind Victoria’s sluggish performance relative to other states are not difficult to understand.

Compared with other jurisdictions, Victoria has experienced relatively subdued levels of population and employment growth since the pandemic.

When combined with the relatively strong performance in per capita dwelling completions, this has led to a subdued post-pandemic market for established houses.

As a result of this along with construction cost increases over the past six years, it has now become cheaper for home buyers in Victoria to purchase existing homes than build new homes.

This has created an incentive for buyers to avoid building new homes where they can.

This contrasts to the situation in South Australia, where new home building is significantly cheaper than existing home purchases.

In addition, relatively modest rental price growth in Melbourne compared with other major capital cities has restricted investor activity in new home construction across Victoria relative to other states.

Facts presented during the presentation support these assertions.

For example:

• Compared with pre-pandemic projections, Victoria’s population as of June 2025 was lower than expected to the tune of 213,742 people. By contrast, populations of Western Australia, Queensland and South Australia were higher than expected to the tune of 151,695, 138,736 and 44,644 respectively.
• As of last December, online advertised job vacancies in Victoria were only 3.6 percent above pre-pandemic levels. By contrast, those in SA, Tas, QLD, NT and WA were up by 92.1 percent, 78.8 percent, 74,9 percent, 68.7 percent and 63.5 percent.
• Over the almost six-year period spanning December 2019 until September 2025, increases in new home construction costs in Victoria exceeded those of established house prices by 20.4 percent. This contrasts with Western Australia, South Australia and Queensland, where established house price rises exceeded those of new dwelling construction by 29.5 percent, 25.2 percent and 20.4 percent respectively over the same period.
• As a result, in Victoria, it is now much cheaper to buy an established house compared with building a newly constructed home. This contrasts with South Australia where building a new home is cheaper compared with buying an established home as well as NSW, QLD and WA, where costs associated with building a new home and buying an established one are broadly similar.

Not surprisingly, forward indicators for Victoria are weak.

Whereas as national building approvals and new home sales have trended higher across most of the country during 2025, detached home building approvals in Victoria have remained flat and have even trended slightly downward in recent months. Meanwhile, new home sales in Victoria remain flat.

(In Victoria, it is more expensive to build a new home than to buy an existing one. By contrast, in SA, building new homes is cheaper than buying existing ones.)

Victorian momentum to build in 2027

Despite the relatively soft performance in Victoria which is expected over 2026, Reardon does expect home building conditions across the state to improve at some stage during 2027 and beyond.

This will occur as greater price appreciation in the established market begins to help new home construction to regain some of its cost competitiveness relative to buying established homes.

However, Reardon cautions that such an expectation remains dependent upon continued migration into Melbourne and no massive surges in the cost of construction.

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