Sydney’s Affordability Fault Line – Why Zoning and Location Pressures Keep the Crisis Entrenched

Across the country, housing costs have far outpaced income growth. In the early 2000s, the median home cost about four times the median household income. Today, that figure has more than doubled to eight times nationally, and in Sydney it’s closer to ten times. Even in regional New South Wales, house prices have continued to rise faster than wages, leaving affordability stretched well beyond historical norms.

For renters, the picture is just as challenging. Low-income renters in NSW now spend an average of 35% of their income on housing — the highest of any state in the country. This mounting pressure underscores why Sydney continues to sit at the epicentre of Australia’s housing crisis, where supply, policy and inequality collide.

While many reforms focus on building more housing, the deeper challenges relate to location, zoning, density and the income–price mismatch.

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Scale of the Challenge

• In the early 2000s, median house prices were around four times median income. In Sydney, that multiple is now approaching ten times.
• Low-income renters in NSW spend on average 35% of their income on housing, the highest of any state.
• Inner-city Sydney remains among the world’s least dense major cities; if its inner-15 km area matched a comparable city like Toronto, it would accommodate an extra ~250,000 well-located homes.

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Why Supply Constraints Persist

Two enduring constraints continue to hold Sydney back:

Zoning and land-use rules
Much of Sydney’s high-demand inner suburbs are locked behind restrictive zoning. More than 50% of residential land within 5 km of the CBD is zoned R2 (low-density), limiting opportunities for diverse and higher-density development.

Slow or limited reform coverage
Even where reforms exist — such as dual-occupancy allowances, low-rise and mid-rise housing changes, or transport-oriented development policies — they apply to only a small portion of residential land and often require lengthy or uncertain approval pathways.

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Location, Density and Income Constraints

The issue is not simply “build more homes”; it is about building the right homes, in the right places, at the right price.

Many new developments are occurring on outer-fringe greenfield sites, far from jobs, infrastructure and established amenities. Others deliver housing types that don’t align with what family-sized households are seeking.

High demand for inner-city, transport-adjacent housing continues to push up the land value component of supply, which in turn raises costs even for newly built homes. The result is that, even with more completions, affordability improvements remain limited unless zoning and location barriers are addressed.

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What This Means for Investors, Policy Makers and the Market

For policy makers:

• Streamline zoning reform so inner-suburban and transit-adjacent land can support more housing.
• Expand approval pathways for medium-density housing (3–6 storeys) in well-located areas.
• Align infrastructure, transport and local amenity investment with higher-density growth corridors.

For investors and market participants:

• Recognise that price growth and risk are increasingly concentrated in areas where supply is most constrained.
• Monitor zoning and reform implementation across Sydney and NSW — incremental changes may shift long-term value patterns.
• Understand that restrictive low-density zoning can act as a scarcity driver; where zoning relaxes, nearby assets may see shifts in both returns and risk.

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Conclusion

Sydney’s housing challenge is not simply a matter of “not enough homes”. As the Grattan Institute stresses, it is about where, how and for whom homes are built. Unless policy reform tackles zoning and location constraints — not just construction targets — affordability will remain out of reach for many.

For younger buyers, renters and the broader economy, unlocking supply in well-located areas is essential to restoring balance and easing the city’s long-running housing pressure.

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