When it comes to housing, a common argument put forward is that the key to addressing affordability revolves around beefing up new supply.

According to that argument, we are simply not building sufficient levels of new housing in order to meet demand associated with a growing population. Increase levels of new construction by enough, it says, and housing price and affordability pressures will ease.

Yet new research suggests the problem may be more nuanced than that. In a recent study, the Australian Housing and Urban Research Institute (AHURI) found that almost eight in 10 new houses (78.3 per cent) which were approved for construction in Australia throughout 2013/14 were aimed within the top four of 10 deciles from a price point perspective – up from 72.5 per cent as recently as 2005/06.

At the other end of the scale, just 5.8 per cent of new houses approved were aimed at the bottom four pricing brackets.

The picture is starker yet in units and apartments, with more than nine in 10 (93.4 per cent) approved in 2013/14 being aimed with the top four price deciles and just 1.2 per cent being built within bottom four brackets – down from 3.6 per cent in 2005-06.

On one hand, this may simply indicate that the market is responding to demand and concentrating new housing delivery within areas that are considered to be desirable (i.e. close to transport links and employment) and thus highly valued. Nevertheless, the minute portion of new dwellings which are being built to cater for lower price brackets prompts questions about the degree to which the current boom in new home construction will deliver stock at price points which are affordable to households on modest incomes.

Professor Rachel Ong, deputy director of the Bankwest-Curtin Economics Centre at Curtin University and an author of the report, said the trend toward less housing being constructed within lower price ranges is worrying.

“What the trends are showing is that there is definitely a very small proportion of housing approvals in the lower priced segments and a higher proportion being delivered in higher price segments,” she said.

“In theory, this shouldn’t be a problem because one would expect that if you have more housing supply in higher segments, then you should start seeing house prices (at the top end) drop and houses trickle down into lower priced segments.

“That’s all theoretical. The problem is that in the report, we looked at trends over a nine-year period and we didn’t actually see this trickle-down effect. This is where it gets really concerning.”

According to Ong, an underlying barrier to lower-priced housing development revolves around challenges for developers in earning acceptable returns on these projects. Since these homes sell for less, they are less attractive for developers compared with higher priced projects.

She says this can be addressed through incentives for developers to provide lower cost housing and government intervention to construct more low-cost homes.

On the first point, Ong says developers often receive conflicting messages about planning and development approval from local councils. This, she said, creates uncertainty and adds to project risk – a particular concern in regard to lower priced developments where margins are often tighter. Taxes and charges on new housing as well, make low cost housing more difficult to deliver. Improving the consistency of information provided and looking at ways to reduce these taxes and charges would help to entice more developers into lower priced segments of the market, Ong says.

In terms of intervention, Ong says measures announced in the recent Commonwealth Budget represent a step in the right direction. These include a larger capital gains tax discount for private investors who invest in housing aimed at low and moderate income earners; an ability for Managed Investment Trusts to be able to set and build or acquire property to be held as affordable housing; a new National Housing Finance and Investment Corporation to provide long term, low case finance to community housing providers; and the ability of direct deductions of rent to be made from welfare payments of tenants housed by public and community housing providers. Nevertheless, Ong says a number of these steps are smaller scale and more could be done in this area.

Finally, Ong says action could be taken to wind back some of the effects of policies which add to the degree of competition which first-home buyers face in the marketplace for housing. As well as home-buyer incentive programs, this includes the allowance of negative gearing and discounts for capital gains tax deductions.

Michael Lennon, managing director of Housing Choices Australia, said there is a shortage of housing across the board but added that this is more pronounced at the lower end of the pricing scale. Pointing to the most recent data published by the Australian Housing Supply Council in 2012 (prior to its subsequent abolition in 2013) which showed that Australia had an aggregate supply shortfall of 228,000 dwellings at that time, he said the national housing shortage would now be above 300,000 in aggregate if we assume that housing consumption patterns have remained the same since then.

Lennon says a critical barrier to delivery of housing at lower price points arises from the rising cost of land and especially serviced land – particularly in areas which are well serviced by transport or employment links. This creates a dilemma, he said, between the delivery of housing in areas which are more expensive or that in areas which are affordable but which lack access to transport and employment. This is particularly the case, he said, amid growing expectations about developers funding social infrastructure such as schools as well as open space levies, headworks and drainage.

In terms of solutions, Lennon says Australia needs a five-to-10-year housing plan. This must be informed, he said, by data about demand side factors such as the impact of immigration and fertility rates on household formation and composition at a disaggregated metropolitan level, along with further data in respect of supply side factors relating to the availability of new land and likely new dwelling construction which will come onto the market at different price points.

Moreover, he says specific measures are needed to boost affordable housing supply. Fundamentally, he says, this involves bridging the gap between the yield which can be offered through affordable rents and that which is required by investors in order to derive a sufficient level of financial return.

Part of this, he said, revolves around interventions to drive new supply of affordable rental stock which is funded by private and community interests and managed by community housing providers. In this regard, Lennon says we need to look at institutional involvement within stable long-term rental arrangements.

A particular area at which he says we should look closely is a type of scheme known as a built to rent program – an arrangement popular in Europe whereby developments are constructed entirely of housing intended to be offered for rental as opposed to being sold to an owner occupier. These, he said, do not rely upon the traditional return on investment model associated with property investment but rather upon generating a return through rents, capital appreciation and government subsidies which are required in order to enable the homes to be offered at an affordable rate.

Action on the rental front is necessary, Lennon said, as the rental housing offers better prospects compared with homes constructed within the owner-occupier segment of the market in terms of providing growth in dwellings which are affordable to low income earners.

Thanks to the current boom in new residential construction, Australia is currently building a large number of new homes.

What we are not building enough of, however, is new housing stock which is affordable to low and middle-income earners as well as being suitable for their needs.