Seven south-west councils are on the verge of releasing their plan to fix the broken housing system

The availability of housing in the south-west has been at all-time lows through the COVID-19 pandemic as house prices have skyrocketed and already tight rental vacancies have become vanishingly rare. But the issue predates COVID-19.

Six councils - Glenelg, Moyne, Surf Coast, Corangamite, Colac Otway and Southern Grampians Shires - came together in 2019 when they saw a critical failure in the housing market across the region, and released a key worker housing action plan in September 2020 to address the crisis. Warrnambool City Council joined the group in 2021.

The report found roughly 4000 key workers - employees in areas like health, education, hospitality and agriculture - were already forced to live outside the region and commute into the south-west.

It predicted thousands more jobs would be created in those industries by 2024, but housing availability wouldn't keep up, further tightening the market and potentially leaving crucial positions unfilled.

And the forecast has played out just as predicted, with south-west hospitality businesses closing or reducing hours, schools forced to cancel and combine classes, and hospitals scrapping services and regularly calling internal emergencies because they cannot cope with demand.

Moyne Shire has taken the lead among the various councils to ensure the project stays on track. Former chief executive Bill Millard, who stepped down last month, had been managing the plan with then-economic development and planning director and now acting CEO Brett Davis.

Mr Millard said the first step had been working out the factors at the heart of the crisis.

"We understand the depth of the problem. We've understood that since 2019," he said. "There is roughly a one per cent rental vacancy rate across the region. Market equilibrium is at about three or four per cent so for all intents and purposes there's very few rentals."

The key worker report identifies several issues driving the lack of housing availability: not enough new houses being built; rental properties being turned into short-term rentals like AirBnB; and rising house prices have driven holiday house and investor purchases, keeping owner-occupiers out of the market. Mr Millard said the lack of new housing was a "pinch point" in Moyne Shire. He said the main challenge was convincing developers to invest in large-scale subdivisions in small towns.

"There's a market failure here in the rental and housing market, because the costs of development in a regional setting are the same as in Geelong or Craigieburn, but the returns have always been different," he said.

"Therefore when it comes to the capital for the development, a developer is not interested in doing a 50-lot subdivision in Mortlake because it would take 10 or 20 years to sell, but you would still have to spend the money upfront to get it ready to sell."

Corangamite Shire director of sustainable development Justine Linley said it faced a similar problem there.

"I think there's recognition that for the development industry in smaller regional communities it doesn't stack up financially to do small-scale development. The profit margins simply aren't there," she said.

"It's the same cost to develop in Geelong as Timboon but you can't sell it for the same price."

Mr Millard said the collection of councils realised early on that a one-size-fits-all approach wouldn't help fix the problem, because even if there were similar factors at play, every town was slightly different.

"What we have decided to do is consolidate a specific set of locations and work out what is required to address the market failure in those specific places," he said.

Each council will commit to one or more specific pilot projects, to work out what works and what doesn't. The interventions could range from subsidies for developers to encourage bigger projects, or providing council-owned land to minimise upfront costs.

"Is it providing $20,000 per lot, or assisting with a different style of housing? Is it one bedroom units in Port Fairy rather than $3 million houses on a large block?" Mr Millard said.

"Can council land be contributed so the developer can build and then we have an arrangement that enables an affordable housing rental?"

Ms Linley said Corangamite had found cutting red tape could possibly provide the incentive needed for developers to get a project under way.

"There can be substantial costs and complexity to rezoning and planning permissions and the amount of time can really be an impediment, so if we can de-risk a project by having all the planning components in place it makes it far more attractive for a developer to be involved," she said.

The beauty of the collaborative approach between the south-west councils, Ms Linley said, was that even if each council only pursued one or two pilot projects, they could then share what worked with all the other councils.

"We are really invested in the regional nuances. Our towns are similar but not exactly the same. So we have been sharing that across the different councils," she said.

"So once we get to the point of knowing what the development costs are for a 40-lot subdivision on a sloping block in a small town, like we would get in Timboon, we will share that with other councils. Then there might be something happening in Hamilton that we could then apply to Camperdown."

In Warrnambool the housing challenge appears to be slightly different to the problem faced by smaller towns. While some believe an influx of new residents has brought a spike in housing demand in the city, Australian Bureau of Statistics data doesn't support this, showing a fall in Warrnambool's overall population during the COVID-19 period due to the closure of international borders. It is possible other factors such as rising house prices have brought more out-of-town investors into the local market, who haven't then made those properties available as long-term rentals.

Warrnambool City Council economic development manager Andrew Paton said it was hard to pinpoint the source of the problem, but he suggested the market, and council, was trying to respond.

New housing approvals in Warrnambool doubled in the 2020-21 financial year, an unprecedented rise, much larger than any other regional Victorian city. But those newly approved developments still had to be built, meaning it will be some time before the new properties come on the market to ease the scarcity.

The alliance of south-west councils are due to submit their proposed locations for pilot projects in June this year. Brett Davis said council had settled on a site and undertaken engineering assessments to make sure it was suitable for the pilot project.

"Timelines will be dependent on the ability to attract delivery partners and on the willingness of governments and the not-for-profit sector to partner in delivery," he said.

Before he left, Mr Millard said he was extremely confident of state and federal government support for the projects.

"It's complex work but the federal government and state government are ringing regularly saying 'have you got something we can support you with?', so I don't have any doubts we'll be supported once we finish this piece of work," he said.

Ms Linley said Corangamite already had projects under way in Timboon and Simpson, and had more planned for the June deadline.

"We were a little bit ahead of our neighbouring councils because we had already done the strategic planning for Timboon and Simpson so we could proceed with a planning scheme amendment for those locations immediately," she said. "We will definitely be adding new sites through the key worker housing plan. We're already examining locations in Terang, Cobden and Camperdown."

The various councils acknowledged the plan won't fix the problem overnight - it will likely take years - but said a long-term plan was the only way to go.

"It needs a different solution because the current one's not working," Mr Millard said.