Melbourne is facing was is being termed as ‘dramatic housing unaffordability’, which will only get worse if nothing is done to address the situation, according to research.

Analysis by RiskWise Property Research shows immense population increases, and lack of dwellings suitable for families in the pipeline, is likely to create strong long-term growth in prices.

Plan Melbourne 2017–2050 forecasts the city will need 1.6 million new homes over the next 35 years with demographer Bernard Salt predicting the Victorian capital city’s population will skyrocket past five million by 2021 and past eight million by 2050.

The futurist also anticipates Melbourne could eclipse Sydney as Australia’s most populated capital by 2030.

According to ABS data, Melbourne is Australia's fastest-growing city and recorded its highest-ever net annual population increase of 125,000 with very high growth rate of 2.7 per cent (2016-17).

Plan Melbourne 2017-2050 states, “Issues that need to be addressed include: housing affordability, the types of housing available to cater for different household needs and lifestyles, and the provision of medium- and higher-density housing close to jobs and services”.

RiskWise CEO Doron Peleg said the sharp rise in dwelling prices in Melbourne, particularly over the past few years, was due to the undersupply of properties suitable for families, meaning supply had been unable to keep pace with strong demand.

The median price for houses in Greater Melbourne is $836,800 and for units $554,571, however, the estimated price of a 105sqm unit, a size that is suitable for families, is $613,593 which puts them out of reach for most families.

“Unless measures are undertaken to boost dwelling commencements and supply of dwellings that are suitable for families, housing affordability cannot be adequately addressed,” says Peleg.

“This imbalance in dwelling construction has been a major contributing factor to housing affordability challenges, remembering that rental properties and owner-occupied ones are not fully substitute products.”

He says that although there was oversupply in Melbourne’s unit market these were not popular with owner-occupiers looking for larger dwellings.

In addition, Peleg says that the price per square metre of rental properties was generally higher than the price per square metre of owner-occupied properties, meaning rental units in Melbourne were significantly less affordable than units that were owner-occupied.

“Housing unaffordability and its connection with housing supply was recognised in 2008 by a Select Senate Committee on Housing Affordability in Australia stating, ‘the sharp increase in house prices in Australia reflects the fact that the supply of housing has been unable to keep pace with strong demand.”

“In the long run, rising demand won’t result in much higher house prices if more housing can be built. Rapid population growth in Australia in the 1950s was matched by record rates of home building, and house prices barely moved,” says Peleg.

The Victorian Government’s Plan Melbourne 2017-2050 aims to tackle the issue by facilitating an increased percentage of new housing in established areas to create a city of 20-minute neighbourhoods close to existing services, jobs and public transport, as well as provide a range of housing types in growth areas, among other moves.

Peleg says measures should also be implemented to accelerate the planning and approval processes and to incentivise local governments that development meet pre-agreed targets in relation to dwelling supply.

“Governments should also be encouraged to increase land supply release and development through co-ordinated strategy and targets,” he says.