Shrinking block sizes should help to make housing more affordable by slowing growth in house prices.
But a report by Domain released on Friday shows value for money per square metre has deteriorated, including in regional Australia.
The land cost has not reduced, buyers are simply purchasing less of it, research and economics chief Nicola Powell said.
"The true cost to buyers is growing faster than the median house price alone suggests," Dr Powell said.
Most Aussies still want to live close to a city or coast, the report said.
The pandemic spurred an immediate shift in working arrangements and sent people flocking to regional towns.
Affordability has also driven many Australians to opt for a "tree change", but value for money has deteriorated significantly and locals on lower wages are being priced out.
In the large capital cities, the average block size for a new house dropped by 13 per cent over 10 years, according to the report.
Despite this, Australia is still home to some of the largest and least densely populated cities in the world.
Cities with development lagging behind the influx of new residents will see the greatest price increases long-term, the report warns.
Population growth, urban density increases and income growth are pushing up the price of housing per square metre.
Sydney remains Australia's most expensive capital city at $2466 per square metre, followed by Melbourne ($1811) and Canberra ($1517).
Australia's top 10 suburbs with the highest price per square metre are all in Sydney.
Outside of Sydney, the most expensive are Melbourne's Albert Park (ranked 26th) and Kent Town in Adelaide (66th).
"For buyers, it's valuable to understand the price per square metre of any home you are looking at," Dr Powell said.
"It can be used to compare neighbouring suburbs to identify areas that might offer better value for money."
She said land release and property tax reform are needed for affordability to improve.
