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Australia's housing shortage has worsened despite falling property prices and is set to keep growing, an official report has found.

The National Housing Supply Council says the gap between supply and underlying demand in Australia widened by 28,200 homes in the 2010 financial year.

New South Wales and Queensland have the largest shortfalls.

The council says the total shortage stood at nearly 187,000 dwellings in 2010 and was expected to reach 215,000 for the 2011 financial year.

Council chair Owen Donald says not enough homes are being built by either the private or the public sectors.

"We simply haven't been producing as much new housing and we've had additions to the number of households over the years," Dr Donald said

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