Why are outer suburban houses so damn big?

The economics of Seinfeld (click)

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 m2 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 a number of 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 around 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.

15 Comments on “Why are outer suburban houses so damn big?”

  1. […] are Australians are super-sizing their homes, asks the Melbourne Urbanist’s Alan Davies. New homes has grown at the same time as the number of people per household has fallen. According […]

  2. jack horner says:

    It’s a kind of mass delusion, isn’t it?

    I spend as much as I can on a lot of space that I won’t use because I hope it will increase the capital gain that I make when I eventually sell the house to someone who will be spending as much as they can on a lot of space that they won’t use because they hope it will increase…

  3. Alphonse says:

    Square metreage per person is inversely proportional to capital gains tax. The world’s most (selectively) friendly tax system produces the world’s most bloated housing stock.

  4. Peter says:

    Why wouldn’t you spend all the money you can find if it returns 10% tax free per a year (7% cap gains, 4% implied rent, -1% costs). Build buy build as much as you can! Unfortunately it will not last. Housing will not be free forever. Eventually we will have to pay for where we live.

  5. Peter Parker says:

    Alan, I’m not so sure that a bigger house appreciates any faster than a smaller house.

    If anything the evidence is the reverse. This is backed up by the ATO, which believes that buildings (house only, not the land) depreciate by 2.5% pa, so are worthless after 40 years (based on their tax breaks for investors).

    While there are exceptions, a smaller older house on a bigger (preferably subdividable) block in a handier location will likely appreciate faster than a new large home on a smaller block in a less handy location. Most small-scale property investors are better off buying an established rather than a new property, even if the former has a smaller house on it (on average).

    Even houses small by today’s standards (3 br/1ba/1 x carport and about 100-120m2 floor area) find a ready market from investors and the smarter first homebuyers. Whereas newly built houses (especially if they’re dearer than a suburb’s median) don’t necessarily appreciate as quickly in their first few years.

    Hence if there is a reason for buying a new large house, I doubt that investment is its primary purpose. Though it could be a secondary purpose. I would put the lifestyle factors well ahead (the new home dream) because financially buying established is generally cheaper than buying new (especially for equivalent land size).

    • Alan Davies says:

      I think that sounds eminently reasonable vis a vis established suburbs, but less compelling for a fringe location.

      I assume for simplicity that on the fringe all lots are empty, all houses are new, and all buyers are owner-occupiers.

      The decision is whether, given a standard fringe lot, the buyer places a larger house on it or a smaller house. Hence location is not a variable.

      Would a bigger house on a given lot appreciate at a faster rate than a smaller house on the same lot? Like you, I’m not so sure either. Perhaps if building costs escalate at a high rate or if it becomes harder to get planning permission to extend a smaller house as the estate ages, then a bigger house would grow faster in value.

      But probably not, although I wouldn’t see it growing in value more slowly.

      I would however stick with my contention in the post that buyers think “a bigger house might even appreciate in value faster than a smaller house”.

  6. psunter says:

    Interesting post … I recall somewhere Alan you’ve previously posted about urban development levies on fringe houses and whether they’re a good idea or not?

    I.E. _If_ it’s agreed that large houses on the fringe do put a strain on the public purse in terms of extra infrastructure that needs to get build to support them (roads, schools) i.e. an “externality”, then perhaps more market intervention is justified even from a neoclassical point of view to change the incentives?

    • Alan Davies says:

      That was here, but it was just a throw away line at the very end.

      I wouldn’t see schools as relevant as they relate more to factors like household size – bigger households need more space.

      Where we’re talking about some concept of ‘excessive’ size – a McMansion – then the relevant inputs are primarily energy and building materials.

      Defining ‘excessive’ would be a hard one. I think if the price of energy and materials was set to reflect their social cost (e.g. via a carbon price) then that would be the way to go.

      Maybe in the absence of the right carbon price another approach, albeit blunter, could be to tax dwelling size directly.

  7. Riccardo says:

    People build them as some sort of investment. The question is, why are there so few other good investment opportunities in this country?

    Where’s the entrepreneurialism? Where’s the small scale IPOs? Mostly dirt diggers. You can’t actively invest on the ASX, all too tightly held and tracks the index.

    I have half my investment funds elsewhere, in the rest of the world where stuff actually happens. Owning one house in Australia is enough exposure to this market.

  8. […] on the other hand, was $212,000 in the September quarter. A settler can build a 176m2 home for a starting price of $150,000 or a 350m2 behemoth for $250,000. The combined land and house price of either option is […]

  9. […] Why are outer suburban houses so damn big? 543 reads […]

  10. […] a simple and direct relationship between household size and dwelling area. If they can afford it, people want space – that’s why the penthouse was invented. This has particular relevance for ‘empty-nesters’ […]

  11. […] to get into the detail of this debate because I’ve looked at it before (see here, here, here and here, or go to Housing in the Categories list in the sidepane for a larger selection). However I do want […]

  12. […] like yesterday we were told Australia had the largest new houses in the world (e.g. see here and here). Now it seems we’ve seen the error of our ways. According to this press report, the head of […]

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