Have buyers abandoned McMansions (forever)?

It 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 head of residential communities at property developer Stockland, Mark Hunter, has no doubt  the era of ever-growing McMansions is over – he expects home sizes to shrink as fast as they grew in the first decade of this century. Mr Hunter is reported as saying three-bedroom, two bathroom houses are the new sweet spot in the market:

With power prices increasing, people want more efficient homes and are happy to sacrifice extra bedrooms, rumpus and media rooms and make do with a single open-plan living and dining area opening onto an outdoor area.

Stephen Albin, the chief executive of the Urban Development Institute of Australia, says the trend to shrinking new home sizes is only just beginning:

I think there’s a massive shift going on and we are at the front end of it. People are starting to realise a five-bedroom house has other costs, from the amount of leisure time you lose maintaining it, to heating and cooling, and you are going to start to find we are at the front end of that shift

He sees a permanent change in Australians’ preferences. “The McMansion’s days are numbered”, he asserts, “just look overseas and see what’s happening”.

In a recent address to CEDA, the CEO of Stockland, Mark Quinn, argued that people are choosing less debt over having five bedrooms and a separate dining room they use once a year at Christmas. People are more patient now, he said, and rather than seek instant gratification they “prefer to wait and have less debt”.

Have Australian fringe buyers really lost their taste for big houses virtually overnight? And is this really a permanent change – is it a “paradigm shift”? Only a few months ago we were debating in these pages home buyers’ preference for seemingly ever-larger dwellings!

I’m hard pressed to see it. Sure, electricity prices – which really could drive a permanent shift toward downsizing – look like they’ll keep rising, but as I’ve pointed out before, there have been massive improvements in the operational energy efficiency of new detached houses over the last ten years. The per capita operating energy required by the average new greenfield dwelling in 2008 was about a third lower than it was in 2000. In fact it was lower than it was in 1960, nearly 50 years earlier, notwithstanding the size of the average new greenfield dwelling more than doubled over this period.

The latest edition of Property consultant Oliver Hume’s Survey of purchaser sentiment in Melbourne’s Growth Areas doesn’t suggest buyers tastes have changed. When the  company asked land buyers what size house they intended to build, the proportion who said greater than 279 sq m was the same in June 2011 (30%) as it was in December 2010 (Oliver Hume say the actual size buyers end up building is about 50 sq m smaller).

We know that Australians are saving more and they’re borrowing and spending less – that’s a key reason for the current gloomy outlook in the retail sector. So we’d expect a more cautious approach by home buyers given current economic conditions. Some buyers won’t enter the market and some might even downsize. That’s pretty much what’s happened in the economically stagnant US at the moment.

Oliver Hume’s survey suggests that what’s happening in Melbourne’s Growth Areas is that the customary buyers of big houses — i.e 2nd plus home buyers and investors — are losing market share to first home buyers, who on average buy smaller houses. That is, there’s a compositional change in the size of dwellings.

But other things remaining equal, when conditions improve I’d expect buyers to pretty well go back to their old tastes and habits. They’re buying less because they can afford less or because they’re not as optimistic about future housing prices in the current climate. They’re not buying less because their tastes have changed permanently. Maybe they ought to, but that’s not the point at issue.

If I were a cynical person I might think it’s in Stockland’s commercial interest to encourage buyers to cut back on dwelling expenditure so as to maintain their spend on land.  A drift to smaller lots need not disadvantage Stockland – the higher yield could work in the company’s favour. Encouraging buyers to take on less debt could make good commercial sense for Stockland in a slowing market if it means purchasers still buy something.

That’s if I were cynical: however let me give credit to Stockland for its new Selandra Rise development in outer south-eastern Melbourne. It offers lots as small as 212 sq m and as cheap as $145,000 (I’ve previously mentioned Stockland’s small lot offerings in its Highlands development at Craigieburn).

I could say the jury’s still out on whether there’s a structural shift in buyers’ taste toward smaller dwellings but really, I don’t think the Court’s in session yet.

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4 Comments on “Have buyers abandoned McMansions (forever)?”

  1. kymbos says:

    Good piece, Alan. I think you’re mostly right in thinking this reversal is short term. But I think energy prices will play an increasing role in household budgets in the futre as energy prices rise and climate change (and ‘sustainability’ more broadly) play a greater role in consumer consciousness. While this may not be a game changer, it should affect property purchases at the margin.

  2. wizofaus says:

    I wonder what’s the average household size of newly built homes in the UK compared to here. It does seem crazy that we feel we need almost 3 times as much space as our cultural ancestors.
    Also, that’s floor space – I would have thought new homes in the UK are more likely to be multi=-storey, so I wonder what the difference in land size is.
    And sure, obviously far too early to tell if it’s the start of a meaningful trend, but one can always hope 🙂 I’d say petrol prices and congestion are likely to be just as much a factor as electricity prices – there has to be a point at which people just start realising that spending $100+ a week on petrol and 15 hours a week commuting is an unreasonable price to pay for having extra floorspace – though it never ceases to amaze me how many people seem willing to make that trade off even now.

  3. 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 214m², up from 150m² just 25 years ago. The average floor area of new free-standing houses also set a record at 245m². 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 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.

    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 that are behind these statements live in whopping big digs on large-sized lots in great city locations.

  4. Pat Sunter says:

    Previous post makes a good point about the economics.

    Just a pointer that I like the ATA’s magazine Sanctuary (http://www.ata.org.au/publications/sanctuary/) – they often feature smaller homes in Oz (both new builds and renovations) that are done really intelligently and offer a good lifestyle.

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