Productivity Commission wants three-storey homes allowed almost everywhere: what it means for first home buyers

Australia's Productivity Commission has just handed down an interim report that takes direct aim at the rule most first home buyers never think about until they're trying to buy in a suburb with almost nothing for sale: local planning law. The commission's central recommendation is blunt - let three-storey homes be built as-of-right on almost all residential land, with exceptions only for genuine environmental, hazard or heritage reasons. It is one of the most direct attempts yet to link Australia's housing affordability problem back to the zoning rules that decide what can be built where.

What the Productivity Commission actually recommended

The interim report, released this week, argues that regulation itself has become a handbrake on new housing supply. Alongside the three-storey proposal, the commission points to a handful of other levers state and territory governments could pull: reducing minimum lot sizes, allowing more mixing of residential and commercial uses, and permitting more mid-rise and high-rise apartments in well-serviced, high-demand locations close to jobs and transport.

The report singles out everyday rules many people don't realise exist - the kind that stop a homeowner adding a granny flat in the backyard, or replacing a single house on a block with a run of townhouses - as some of the biggest quiet contributors to the housing shortage. The commission's argument is that relaxing these land-use controls, and coordinating the infrastructure (water, power, roads) that needs to go with new density, would do more for supply and affordability than almost any other policy lever available to government.

A public webinar on the interim report is scheduled for July 30, with submissions open until September 30, 2026. This is a proposal at the consultation stage, not a change to law - state and territory governments would each need to act on it, and history shows planning reform in Australia tends to move slowly and unevenly between jurisdictions.

Why this recommendation exists in the first place

• Supply has consistently lagged demand: Australia's population and household formation have grown faster than new dwelling completions for years, and the commission frames planning restrictions as one of the clearest reasons construction hasn't kept pace.
• New Zealand as the reference point: The report points to New Zealand's earlier upzoning reforms, which allowed similar density increases in major cities, as an example of the kind of supply response broad-based rezoning can unlock over time.
• It targets structural cost, not demand-side subsidies: Most first home buyer policy in recent years - grants, low-deposit schemes, stamp duty concessions - helps buyers afford what already exists. This recommendation is aimed at increasing what exists in the first place.

What this means for first home buyers

It's worth being realistic about the timeline here. Even if state governments move on some or all of these recommendations, rezoning, approvals and construction take years to translate into homes that are actually available to buy. This is not a policy that changes what you can afford next month. But it is a signal worth understanding if you're planning your next few years around where and when you buy.

• If you're set on a particular established suburb with tight low-density zoning, broader upzoning could eventually mean more townhouse and small-apartment stock coming onto the market there, which may widen your options over time.
• If you already own a standard house block in a location the commission's recommendations would affect, it's worth understanding how future planning changes could affect what you're permitted to build or subdivide, particularly if you're weighing a knockdown rebuild or a granny flat.
• Because any actual rezoning will differ state by state and even council by council, it's worth checking your own state planning department's response to the interim report rather than assuming national rules apply everywhere at once.

Run the numbers

Planning reform is a long game, but your own borrowing position and timeline are things you can model right now:

• Borrowing Power Calculator - work out what you could realistically borrow today, whatever the future supply picture looks like
• Rent vs Buy Calculator - compare renting while you wait for more housing stock to come to market against buying into today's conditions
• Am I Ready to Buy? - a quick check on whether your finances are in shape to move when the right property, in whichever suburb, comes up