Are Melbourne’s houses too big?

Metricon’s Grandview – what a 27 square (252 m2) house looks like

According to the State’s Building Commission, new houses in Victoria were 252 m2 on average in 2008-09 compared with 217 m2 in 2000-01. This report says “homes in Victoria are getting bigger, much bigger – leading to warnings that some people may be building homes bigger than they need by borrowing more than they can afford”. The Building Commissioner is quoted as saying:

The promotion of larger homes by medium and high volume builders, where added rooms are used as a marketing tool, have contributed to the increase in size……consumers are up-sold to home theatres, additional bathrooms and media rooms

I have a couple of thoughts/reactions to this.

First, some context – while there are buyers who want a behemoth like Metricon’s 49 square ‘Monarch’, almost three quarters (74%) of Growth Area buyers purchase a single level dwelling. Moreover, 70% of homes are less than 30 squares and 47% are less than 26 squares. Some are buying a “McMansion”, but most are buying something like Metricon’s Grandview.

Second, the claim that buyers are so gullible they are “upsold” to bigger homes they don’t “need” is patronising. Buyers do know what they want. Two thirds of Growth Area purchasers are buying their second home – half of this group are buying their third or fourth home. And nearly half (48%) of adult buyers in the Growth Areas are aged 35 years or more.

Third, if people are buying homes they can’t afford, that’s not primarily an issue of dwelling size. I expect over-stretched buyers would more likely be purchasing a home that’s closer to the city centre — it would be smaller than a fringe “McMansion” but cost more because of its greater accessibility. If there has been an upward movement in the proportion of people buying homes they can’t afford, the problem and the solution lie with lending policies rather than with dwelling size.

Metricons 49 square (452 m2) Monarch

Fourth, there’s nothing inherently unusual or “wrong” in people buying more of what they want. If something they like gets cheaper or they get richer, on average people can and will buy more of it. In this instance the focus is on people choosing to buy more housing space but they could just as easily be buying more restaurant meals, overseas holidays, Vespas, private school hours, iPads, or whatever.

Fifth, what matters is that buyers pay their real costs. The problem to address isn’t the size of houses per se, but distortions in price signals that lead to excessive resources being diverted to housing. The focus should be on issues like the tax-sheltered status of owner-occupied housing and the absence of a price on carbon.

Sixth, this isn’t just a fringe Growth Areas issue. I live in the northern suburbs 8 km from the CBD and virtually every house in my neighbourhood has been extended in its lifetime or replaced by a new detached dwelling – in fact there’s something with the faux Robie House look of the ‘Monarch’ not far from where I live. An area of 253 m2 (27 squares) would no longer be considered exceptional in this area. When the average household size is compared with the suburbs, I suspect houses in my neck of the woods probably have at least as much space per capita as houses in the Growth Areas.

Finally, this issue reminds us that there isn’t necessarily 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’ who, policy makers often assume, want to down-size. There’re many reasons why that might not be the case — in fact it seems they prefer to hang on to their large house rather than relinquish it for use by a family.

17 Comments on “Are Melbourne’s houses too big?”

  1. Peter Hill says:

    Alan, agreed. They buy want they want and what they think they can currently afford, and not what they are “conned” into wanting,

    Here’s the rub: the larger the home (in internal area of living space or floor area), the larger its energy consumption and thus carbon dioxide emissions from fossil fuel energy use. The application of energy required for a desired degree of environmental temperature control (i.e. cooling and heating) increases as the square-root of the measure of floor space increase (ignoring changes in wall heights and window areas). Energy consumption for lighting increases directly with the measure of increase in floor area. Also, there is the alienation of productive agricultural land for locating the single-dwelling suburban sprawl. There are warnings of imminent affordable food shortages at the global level due in part to increased farmland subdivision in major “poor” industrialising countries such as China.

    • Alan Davies says:

      Provided home buyers pay the real costs they impose on the environment and on others then the size of the house they build shouldn’t be an issue. Hence my point five above – the focus should be on getting price signals right. The proposed price on carbon emissions is a start.

      I think the whole “sterilisation of productive farmland” issue doesn’t stand up to scrutiny (see here).

  2. Russ says:

    Probably the more interesting element of the increase in housing size is that it has been occurring on smaller blocks of land. This is at the behest of planners, but it has meant many backyards on the fringe are now courtyards – much better for water conservation, but maybe other aspects have been lost: home produce, areas for children to play outside.

    Conversely I’ve been trying to deal with the complete opposite problem for the past few months. Most new two bedroom apartments are too small; the bedrooms particularly, and sometimes bizarrely when outdoor space is preferred over an extra couple of feet inside. In the grand scheme of things, insufficient living space is a much more serious problem than having too much.

  3. Matthew Gordon says:

    I think there is an opportunity for a cultural revision of home sizes. The commonplace feature of having a spare room I find morally challenging, when we leave our old folks in retirement villages and our children out on the hunt for non-existent cheap rentals close to education and amenities. If we are going to have larger houses, then let’s bring back the three generation household. Painful to begin with (particularly for the in-laws), this will tackle sustainability issues, housing affordability, student and elderly welfare and childcare issues all in one hit. Thoughts?

  4. brisurban says:

    I’ve never understood this moralising. If you want a big house, buy one. Just make sure that you pay for it.

  5. 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 for a second or two – wants us to buy something smaller and magically make our housing problems disappear. Sadly, too few of those who clog up the blogosphere with urban commentary understand the economics of new housing or the decision-making process of a rational buyer.

    Recent statistics published by Commsec 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 214m², up from 150m² just 25 years ago. The average floor area of new free-standing houses also set a record at 245m². They appear to now be even bigger in Victoria. 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 around 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 (my home state) could cost as much as $250,000.

    In contrast, a 150m² three-bedroom base level house on that land would cost about $135,000 or around $2,500/m² as a total price (including the price of the land). Now a larger 250m² four bedroom house with a study might cost $175,000, making the end package cost $425,000. The buyer gets 100m² 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 ten percent 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.

  6. kymbos says:

    The ‘revealed preference’ of consumer purchases is perhaps not as straightforward as you suggest, Alan. There may be a disconnect between what a consumer superficially wants, and their understanding of the long term costs of their preferences.

    For example, I recently did some renovations on my house, featuring the installation of a large window. The window I wanted was double-glazed, the new wall around it would have thermal mass and significant insulation. The joiner who installed the window immediately recommended against a double-glazed window, suggesting instead a thicker single pane. I cannot confirm, but I am informed that a thick single pane has almost no greater insulative properties than a standard thickness pane. He confessed that he had never installed a double glazed window, that most people ‘don’t want them’. He also suggested I don’t bother with all the insulation I installed.

    The reality is, he has a strong incentive to advise against options that may have lower cost over their lifetime, if their upfront costs are higher (he receives no greater margin from installation, and the higher cost may discourage sales). Conversely, more living space, more bedrooms and bathrooms may appeal at the point of sale when purchasers are looking for visible ‘value for money’, but could be poor decisions over the long term in the light of energy prices and property maintenance.

    There could be significant information failures at work in the property market which distort decisions of consumers who are certainly uninformed of long term costs and benefits, and are influenced by agents with a different set of incentives to their own.

    • Alan Davies says:

      It’s true that humans tend to favour present benefits over future costs. But then policy-makers are far worse at deciding what you or I really want. Probably the best we can do is educate the consumer by making sure the info is out there and regulating against blatant misrepresentation by sellers.

      I might add I know of a few people who’ve invested money in energy and water conservation measure’s and have no realistic hope of getting their money back within a reasonable time frame. But like Monarch buyers they get other benefits – esp status.

  7. Alan Davies says:

    Senior The Age writer, Suzy Freeman-Greene, takes a tour of the ‘Monarch‘. I think some perspective is needed here — the ‘Monarch’ does not signal that “the days of the humble home are at an end as goliaths invade suburbia”. Homes of this size in locations like Balwyn relatively close to the city centre cost in the region of $2 million. This is far from typical of Melbourne suburbia.

    I should’ve made this point in the post because I’ve made it before, but see here – a key reason the average new house size is increasing may be because first home buyers, who favour smaller houses, are vacating the market with the winding back of first home owner assistance i.e. it could be primarily be a compositional shift.

  8. jack horner says:

    I agree that we should not make moral judgments about people’s preferences, providing they pay the appropriate prices.

    But I’m still mystified by – why do they want such huge houses? They can’t possibly actually use all the space, in any practical sense of the word ‘use’ (that is, disregarding status factors).

    Go into any McMansion living room, and you will find that the virtual room is the corner with the sofas, coffeee table and TV. This virtual room is much the same size as it always has been, not surprisingly as it is based on the size of a human body. The rest of the physical room is just inefficient circulation space.

    And yes, given the cost of the land, extra space has declining marginal cost (Michael). So if one icecream costs $3, will I immediately eat a second because it only costs $2? And a third because it only costs $1?


    • Alan Davies says:

      More likely you’ll upsize from a single cone to a double cone for maybe a 30% increase in price (see this fascinating diagram showing portion size inflation in the US over the last 20 years). As I explained once before, you can buy Burbank Homes’ “Daffodil 1900” on the typical block for $350,000, or you can buy Burbank’s “Stoneleigh 3800” on the same block for $450,500. You pay 28% more but get a 100% increase in floor space.

      I don’t think you can disregard status – I think that’s almost entirely what it’s all about. That $100,000 could be spent on other ways of impressing people, but getting double the space must seem like pretty good value. Status really, really matters:

      “A new study by researchers at the University of Warwick finds that money only makes people happier if it improves their social rank. A well known example of this effect was documented by economist Robert H Frank. He asked people if they would prefer to live in a 4,000 ft2 house where all the neighbouring houses were 6,000 ft2, or in a 3,000 ft2 house where all the neighbours lived in houses that were 2,000 ft2. A majority of respondents chose the 3,000 ft2 house – smaller in absolute terms than the first option but larger in relative terms”.

  9. suze2000 says:

    Why – when discussing urban mobility – do people neglect the serious disincentive that is Stamp Duty on real estate? I can possibly afford a larger house (desperately needed) but when I take into account the $30000 the State Govt got on this place, and the $45000 it would get on the next, moving house within 10 years becomes an impossibility if I’m paying the mortgage and, you know, living!

    Why would an older empty-nest couple vacate their much-coveted (by me) larger house with a yard I’m still fit enough to tend when it’s likely to cost them $40000 in stamp duty for the privilege of moving into a smaller place, with people closer to them (often much noisier and more unpleasant), not to mention the other costs associated with moving house? Why would they? I wouldn’t. I’d stay in my big old house until I die.

    When is the state govt going to get fair on stamp duty? It’s a big fat tax on moving house and prevents mobility.

    • Michael says:

      I wonder if there was a stamp duty exemption for over 65’s if they downsized (appropriate safeguards required) would there be much of an effect? I’m sure there are many more factors keeping empty nesters in large family homes. There are usually strong ties to the local area so they may not be able to find suitable smaller accommodation in their area to downsize to.

      • Alan Davies says:

        If empty-nesters buy (say) a smaller $500,000 dwelling the stamp duty is $22,000. That would be a significant saving if exempted. But I fear it wouldn’t be enough. There’s still the issue that apartments in the same suburb are often not much cheaper than houses, but substantially smaller.

        A move to Qld’s Sunshine or Gold Coasts from Melbourne or Sydney in the 70s and 80s was popular because it offered much cheaper housing, a warmer climate and proximity to useable beaches. Is there some way to replicate those sorts of conditions?

  10. […] not going 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 […]

  11. […] only seems 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 […]

  12. It would be precise that Australian homes are bigger than the average homes of many people from all over the world. AUstralianj prefer bigger homes because it gives them proper space and air that contributes to healthy living.

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