Bigger houses make economic sense

One of the current social themes is that the consumer is to blame for wanting a big home.  The new social order – excuse me if I get on my hobby-horse (again, you all say) for a second or two – wants us to buy something smaller and magically make our housing problems disappear.  Sadly, too many who clog up the blogosphere with urban commentary don’t understand the economics of new housing nor a rational buyer’s decision-making process.

Recent statistics published by the CBA show that Australia has the largest homes in the world, with the average floor area of a new dwelling (including townhouses but excluding apartments) topping 214 square metres, up from 150 square metres just 25 years ago.  The average floor area of new free-standing houses also set a record at 245 square metres.  Our homes are much larger than those within Europe and even many American cities.

Why has this occurred?

It is simply economics.  The actual land component of a new house-and-land package is very high and fixed.  The land usually costs about two-thirds of the total purchase price.  This is particularly the case for basic or entry-level new housing.  For example, the land component of a basic $375,000 house-and-land package in Queensland could cost as much as $250,000.

In contrast, a 150-square-metre three-bedroom base level house on that land would cost about $135,000 or about $2,500 per square metre as a total price (including the price of the land).  Now, a larger 250-square-metre four-bedroom house with a study might cost $175,000, making the end package cost $425,000.  The buyer gets 100 square metres of extra house for just $50,000 more.  The total end price per square metre has now dropped to $1,700 or 30% less.

Here is the real rub.  Assuming that the buyer can afford to pay the extra deposit and fund a $425,000 house-and-land package, all it costs – assuming a 10% deposit and using today’s rates – is an extra $10 per day in mortgage payments.  The new home buyer can now own a home that is two-thirds larger for just $70 per week.  To upsize the house, as outlined in the example above, would cost the buyer an extra $3,640 per year.

Given the high cost of land in and around our capital cities, the trend towards larger new homes makes economic sense.  Consumers are just acting in their own interests and are making rational decisions to choose a larger and more valuable home for what is a small additional out-of-pocket expense in the broad scheme of things.

Unless there are real economies in the land content – for example the plentiful supply of subdivided land to keep land prices keen – building a small house on a more traditional-sized suburban block of land is often not the best value for money.

PS And yet the large publicly listed development companies continue to peddle that the key to affordable housing is smaller homes (on smaller allotments). Yet at the coalface, agents tell us they are the last to sell and more often than not they resell quite poorly too.  What would really improve housing affordability would be the timely release of land in major estates.  Too often the big boys drip-feed supply onto the market in order to keep the land prices high via the illusion of undersupply.  Yet the mainstream media don’t question the press releases about McMansions and about how we should really live in smaller homes.   I find such particularly rich given that those who are behind these statements live in whopping big digs on large-sized lots in great city locations.