Everyone knows that Australians build the largest new houses in the world. According to the deputy governor of the Reserve Bank, real expenditure on each new dwelling is now 60% higher than it was 15 years ago.

Just why we need 85 square metres per person, on average, in our new suburban houses is an interesting question, especially given that the average household size in Australia has fallen.

As with most things, it’s the coincidence of several factors that provide the most plausible explanation, but in my view the key reason is that Australians increasingly see the purchase of a dwelling as an investment decision.

There was a time when buying a house was solely about consumption — i.e. shelter — but now it’s received wisdom that houses inexorably increase in price. They provide growing equity to borrow against in the future and capital to draw against if the unthinkable should happen.

Recent history has convinced home buyers that residential property is a good, even spectacular, investment. This reflects factors such as its tax-sheltered status, restrictions on supply, low interest rates and federal and state home buyer assistance schemes.

From the perspective of many home buyers, a bigger house not only provides more consumption value but is seen as a sound long-term investment decision. Unlike a car, which depreciates in value, buyers assume every dollar spent on a house ultimately increases in value. A bigger house might even appreciate in value faster than a smaller house.

Underpinning this apparently attractive investment proposition is rising incomes. Australians have been getting richer and accordingly have been doing what wealthy people do — consume more of the good things. A bigger house gives more status, more functionality and more privacy. They buy bigger houses because they can.

A key factor here is that many home buyers in the fringe growth areas are second or subsequent home buyers who are trading up. It’s true that most recipients of the first home owners grant buy in the outer suburbs, but according to Birrell, O’Connor, Rapson and Healy, they nevertheless only account for a minority of home sales in the outer suburbs.

It’s variable, but first home buyers comprised only 34% of this market in 2001/02 and 18% in 2003/04. However, according to property group Oliver Hume, they made up as much as 70% of outer-suburban demand in 2007/08 when the first owners grant was at its strongest but have now fallen back to about 50%.

Another factor is that the marginal cost of extra dwelling space is low. Consider a home buyer in Melbourne purchasing a 500 m2 lot for $200,000. He or she can buy the single storey 176 m2 “Daffodil 1900” from Burbank Homes at a starting price of $150,000, giving an all up price of $350,000.

Or they can buy Burbank’s double storey 353 m2 “Stoneleigh 3800”, priced from $250,500, giving an all-up price of $450,500. By choosing the larger house, they pay 28% more in total but get 100% more floorspace. Provided they can afford it, this would seem a no-brainer for most people. After all, it’s an investment!

There are various other explanations (although I see most of them as subsets of rising incomes). People are having fewer children than their parents, but they nevertheless expect their children to have their own bedroom. Adult children stay at home longer nowadays so there’s a need for more privacy — since it’s affordable, it’s nice to have separate bathrooms, additional living areas and extra parking.

People work and entertain more at home, so they want and can afford more space for an office and a home theatre. The capital cost of installing refrigerated air-conditioning and heating systems is remarkably cheap so environmental comfort is not the constraint on size it once was. They might be expensive to operate for some, but they can be zoned and used selectively.

I have no information either way, but I wonder if our relatively efficient house-building industry, coupled with the economies of scale of  big developments, might also take a bow here.

Of course, not all homes on the fringe are super-sized. As I noted here, average dwelling size has fallen over the least three years in all Melbourne’s growth areas except the west, due to the unprecedented demand from first home buyers in 2007/08. Most building companies offer modest homes along with large ones. Burbank, for example, offers a 150 m2 house and a couple that are less than 170 m2. Stockland is offering some 213 m2 lots in its new Highlands development at outer suburban Craigieburn in Melbourne, giving a $269,000 price for a three-bedroom, six-star energy rated, house and land package.

And very large houses aren’t solely confined to the fringe. Almost half of all dwelling investment in Australia is in additions and alterations. When account is taken of the smaller average size of households closer to the centre of our cities, many renovated houses and terraces may not be that much smaller in terms of space per person than fringe “McMansions”.

Average new house sizes have fallen in the US since the GFC. There’s a good chance ours will too when the current boom ends.

*This first appeared on the Melbourne Urbanist site.

Peter Fray

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