Modular Homes Could Cut Building Costs by 20 Per Cent. So Why Is Australia Still Building the Slow Way?

With building approvals still running well behind the pace needed to hit the National Housing Accord's target of 1.2 million new homes, governments and lenders are placing bigger bets on factory-built construction. It isn't a new idea, but 2026 is shaping up as the year it stops being a niche one.

Australia's housing shortfall isn't closing. Projections point to a gap of somewhere between 200,000 and 300,000 dwellings against the Accord's target, and the construction industry building toward that number is slower than it used to be average build times have stretched by roughly 40 per cent since before the pandemic. Labour shortages, cost blowouts and a string of builder insolvencies have made the traditional way of putting up a house harder to rely on.

That backdrop is why modular and prefabricated construction building a home's components, or entire rooms, in a factory before trucking them to the block has gone from a fringe idea to a policy priority. A 2026 report from the Committee for Economic Development of Australia (CEDA), produced with Urbis, argues that scaling up what it calls "modern methods of construction" is one of the few genuine levers left to pull. The appeal is straightforward: build indoors, on a production line, shielded from weather delays and site-by-site trade shortages, and a home can go up faster and for less.

The numbers behind the pitch

The case isn't just theoretical. Modelling cited in the CEDA report suggests these methods can cut construction costs by around 20 per cent and shorten build times by 20 to 50 per cent when used at scale. Translated into something more concrete: that's a house delivered two to five months sooner than usual, and an apartment building finished up to a year ahead of schedule. On cost, a 20 per cent saving would strip more than $116,000 off the construction cost of an average apartment and more than $13.6 million off a typical Sydney apartment building. For an industry where time on site is one of the biggest costs on the ledger, that's not a marginal gain.

Governments have started acting on it. New South Wales, which is estimated to be around 31 per cent short of its own housing delivery target, used its 2026-27 Budget to commit funding toward a state-backed factory for modern construction methods, to be delivered in partnership with a manufacturer selected through a competitive tender process opening in the coming weeks. Alongside it sits money to modernise the state's building approvals system, pilot AI-assisted licence processing, and notably build a national certification framework for modular and prefabricated products, something the sector has lacked until now. Two new grant programs are also opening: one offering $20,000 to $150,000 to help established manufacturers adapt the technology for mid-rise and high-rise housing, and another offering up to $250,000 to help smaller manufacturers pilot and scale innovative building products more broadly.

Why the banks matter as much as the factories

None of this fixes much if buyers can't get finance, and until recently, that was the sticking point. Standard construction loans are built around the idea of a lender inspecting a home on-site at each stage before releasing funds. A modular build breaks that model, a large share of the home's value is created inside a factory, off-site, before a bank's valuer ever sees it. That's made lenders cautious about everything from valuation to what happens if a manufacturer goes under mid-build.

Commonwealth Bank has started closing that gap. It now maintains a list of accredited "assessed manufacturers" and, for fixed-price contracts up to $1.5 million with a builder on that list, will release progress payments during the factory build itself rather than waiting for installation. One of the first manufacturers accredited under the scheme is using the backing to build a new factory on the Sunshine Coast that should nearly triple its output, from around 200 homes a year to roughly 550, while adding an estimated 70 jobs in the region.

The other major banks haven't matched that approach yet, which means a homebuyer's ability to finance a modular build still depends heavily on which lender they walk into.

Where it still falls short

None of this makes modular construction an instant fix. It remains a small slice of the market under 5 per cent of new home building nationally, and there are real reasons it hasn't scaled faster. Certification has varied from state to state, which is exactly the gap NSW's new framework is meant to close, and valuers in areas unfamiliar with factory-built homes have tended to price them conservatively, which can undercut the savings buyers are chasing in the first place. There's also a perception hurdle: for many buyers, "modular" still conjures site sheds and demountable classrooms rather than the architect-grade housing the industry is now producing.

The more realistic reading is that 2026 marks the point where the pieces needed to scale the industry government-backed manufacturing capacity, a national certification system and at least one major bank willing to lend against it are starting to line up at the same time, rather than arriving in isolation as they have in the past. Whether that's enough to move a national housing shortfall in the hundreds of thousands is a longer story. But for buyers and investors watching where new supply might actually come from over the next few years, factory-built housing has gone from a curiosity to something worth taking seriously.