Stamp duty concessions and home subsidies should be scrapped to encourage more buyers to live in Melbourne suburbs with existing infrastructure, an independent advisory body says.
In a new report published on Tuesday, Infrastructure Victoria laid out a plan for the state government to make better use of established infrastructure through more diverse housing options.
Melbourne is expected to overtake Sydney as Australia's most populous city in 2031 or 2032 and will need about 1.3 million extra homes by 2051 to accommodate another 3.1m people - about 44,000 new homes a year.
Infrastructure Victoria surveyed 6000 households in Melbourne, Geelong and Ballarat in mid-2022 and identified a three or four-bedroom detached house in an established suburb, close to family and friends, as the "notional ideal home".
But that ideal is well out of reach for moderate-income households (earning between $88,021 and $132,030) in most inner and middle Melbourne suburbs, based on property sale analysis.
That is driving demand in growth suburbs, pushing people further away from jobs, schools and public transport, Infrastructure Victoria chief executive Jonathan Spear said.
"Households on moderate incomes, many of which are families and first home buyers, are being locked out of Melbourne's middle suburbs," he said.
Over the past decade, the seven local councils home to Melbourne's greenfield suburbs accounted for 50 per cent of Victoria's population growth.
Building new infrastructure such as roads, electrical grids, and telecommunications in these areas is estimated to be up to four times more expensive than adapting in established suburbs with growth capacity.
The state government must make difficult investment choices, given competing interests, budget constraints and current shortages of labour and materials, Infrastructure Victoria said.
Its metropolitan planning strategy has mapped out a scenario for 70 per cent of new homes to be built in established suburbs by 2051, with the remaining 30 per cent in greenfield areas.
To meet that ratio, 932,000 new homes would be need to be built in Melbourne's existing suburbs, but the city is falling short of these aspirations.
"The share of new homes built in established suburbs is declining, and in 2021 fewer than half were in Melbourne," the report said.
The survey, the largest of its kind in Australia, found almost one in five people would trade off house and land size to live in an established suburb-based apartment or townhouse if prices were more comparable.
That's about what is needed to meet the government's scenario for 70 per cent growth in established areas, Dr Spear said.
Infrastructure Victoria offers 10 policy options for the government to consider, including overhauling the infrastructure contributions system for developers, removing stamp duty concessions and ultimately abolishing the duties altogether.
In Victoria, first homebuyers do not need to pay stamp duty on properties under $600,000 or dwellings bought off the plan, which are typically in greenfield areas. They can also access grants of up to $10,000 and other concessions.
Stamp duty could eventually be replaced with a broad-based land tax as is slowly being rolled out in the ACT and offered to first homebuyers in NSW.
In addition, the number of eligible locations for the Victorian Homebuyer Fund could be changed to encourage more purchases in established suburbs and the First Home Owner Grant ended to remove upward pressure on greenfield area prices.
Other options involve fast-tracking planning approvals for high-quality townhouses, improved standards for low-rise apartments and new home targets in each Melbourne local government area.
The proposed measures don't have to be adopted but Dr Spear said there would be consequences if they are not.
"We would have to absorb that additional population growth through increasingly sprawling greenfield suburbs that cost two to four times more to service," he told AAP.
"We're all going to pay for that for a long time."
Acting Premier Jacinta Allan said the government would review the recommendations, but said the Suburban Rail Loop would address concerns such as access to public transport.
"We are always reviewing revenue options (and) planning to make sure that we are driving the best outcomes for Victorians," Ms Allan told reporters in Melbourne on Tuesday.
