The largest number of building approvals in five years will struggle to make a dent in pent-up demand for new homes as signs grow the federal government’s property tax changes are weighing on the property market.

Figures from the Australian Bureau of Statistics on Thursday showed almost 205,000 houses, apartments, units and townhouses were approved for construction through the 2025-26 financial year, a jump of 8 per cent on the previous year.

Surges in approvals in the ACT (up 41.9 per cent), Queensland (23.3 per cent) and NSW (6.1 per cent) helped push total approvals up to their highest level since 2020-21 when official interest rates were at 0.1 per cent and the COVID-era HomeBuilder program was in place.

At 205,000 homes, approvals were modestly above the estimated 190,000 needed each year to keep up with Australia’s population growth. Annual approvals of units reached their highest level since 2017-18.

But approvals are now a combined 86,000 short of what is needed to meet the federal government’s 1.2 million home target for the period 2024-25 and the end of the decade. It is also 33,000 short of the record annual approvals set 10 years ago.

Master Builders Australia chief executive officer Denita Wawn said despite the increase, much more had to be done to lift the supply of new homes while reducing construction costs that would lead to more affordable properties.

“We are in the midst of a housing supply crisis, we have an Olympics’ construction surge (Brisbane 2032) on the horizon, and we need more infrastructure, schools and hospitals,” she said.

“Now is the time to get construction policy right and affordability back on track. We can’t kick the can down the road until the next budget.”

Commonwealth Bank economist Lucinda Jerogin cautioned that boosting construction while keeping a lid on costs would be difficult.

“Higher interest rates remain a constraint on construction activity, while supply‑chain disruptions associated with the Middle East conflict and broader capacity constraints in the sector pose upside risks to construction costs,” she said.

This week’s June inflation figures showed housing construction costs climbing at their fastest annual rate in almost three years.

Reserve Bank chief economist Sarah Hunter said those higher costs were partly due to the surge in oil prices caused by the US war against Iran.

Builders were facing higher prices for everything from glass to plastic pipes.

While building costs remain elevated, Hunter noted that the inflation rate, which eased to 3.8 per cent, had come in softer than the Reserve had expected.

“It was a small undershoot on what we were expecting [and] that’s the right direction given where we are. We want inflation to come down. So that’s good,” she told the Barrenjoey economics forum.

Hunter noted that the housing market, with values falling in Sydney and Melbourne and slowing sharply in other major markets, was likely to face further headwinds.

She said the RBA’s three interest rate hikes earlier this year were still to work through the economy while the May budget’s tax changes to negative gearing and capital gains tax had also affected sentiment across the property sector.

“We’ve had some of those tax changes coming through and the market … [and] people are absorbing that and thinking about what that might mean around their decisions.

“And that’s probably added to it and just generally [the] sort of broader economic uncertainty at the moment.”

Some of that uncertainty was evident in figures released by NAB on Thursday. It reported that mortgage applications fell by 15 per cent in the June quarter against the first three months of the year.

Real estate experts have reported a sharp fall in the number of investors looking to buy existing properties since the budget measures were announced. Last month, Westpac reported a 20 per cent drop in investor loan applications.

Cotality on Thursday reported that the auction clearance rate for last week was almost 50 per cent, a 4.4 percentage point lift on the previous week and the highest result in almost two months.

Despite the improvement, the clearance rate is well below the 68.5 per cent rate achieved in the same week last year.