Incentives worth nearly $3 billion paid to first-home buyers across Australia also risk driving up house prices and are not the most efficient way for governments to support people into housing.

The commission has recommended governments phase out the incentives, while also concluding the national housing and homelessness agreement had failed to improve homelessness outcomes.

The federal government should also commission a review of the $5.3 billion annual Commonwealth Rent Assistance program, which pays a supplement to people who rent privately or in community housing.

Rent assistance was designed on sound principles but fell short on principles of fairness and sufficiency, with some recipients still experiencing rental stress and payments not always targeted to people who need them most, the commission said.

Rental assistance should be paid to people based on need rather than where they lived, the commission said, recommending this model be trialled to allow assistance to be paid to people living in both social and private rental housing.

The Productivity Commission said Australia had a housing affordability problem and the national housing and homelessness agreement was ineffective and needed an update to set out a national reform agenda to making housing more affordable.

The commission's assessment of the national housing and homelessness agreement said state and territory governments should phase out assistance, including grants and duty concessions, provided to first-home buyers.

"The public and private benefits from assisting people who are - or at risk of - experiencing homelessness are likely to be greater than helping people buy a home," the report said.

Subsidies paid paid to property owners to offer affordable rental housing were "inflexible, inefficient and often unfair", the commission said, recommending the funding for the subsidies be redirected.

The report said relaxing some zoning rules could encourage higher density housing in residential areas, and encouraged governments to consider changing rules that allowed only single detached houses in certain zones, increasing the allowed density along transport corridors and relaxing rules that limit secondary dwellings.

The commission also recommended governments consider loosening minimum car park requirements in areas with access to public transport and minimum floor sizes for dwellings.

"Any changes to zoning regulation should balance the benefits of additional supply against costs to the environment, amenity and liveability of cities," the report said.

The commission said all states and territories should set housing targets, and the next national housing agreement acknowledge the importance of housing supply as a solution to housing affordability pressures.

Malcolm Roberts, a full-time commissioner to the Productivity Commission, said there was clear evidence there was unmet demand for housing, which showed up in very low rental vacancy rates.

"We think more supply is a big part of the equation - a really big part of the equation," Mr Roberts said.

"And rather than telling states and territories, 'These are the regulatory reforms you need to implement' and hope that delivers more supply, we're really effectively saying that governments need to work out some meaningful rolling targets for supply and then find their own ways to achieve that."

Mr Roberts said it was important for governments to continually refine housing policy to ensure it continued to meet its intended outcomes.

"One of the best ways to ensure governments stay focused and policy can change as need be is to, first of all, have reasonable performance measures, have the data that allows you to come to the conclusion about how you're tracking against those measures, and to have those regularly released and regularly publicly reported," he said.

"We think it's important the next agreement is underpinned by better performance indicators and annual public reporting to make sure everyone can follow the progress governments are making."