One of the current social themes is that the consumer is to blame for wanting a big home.
And they have been at it again over the weekend.
One of the much touted solutions to housing affordability is to shrink the dwelling size.
But this ignores economics and a rational buyer’s decision-making process.
Recent statistics, published by Commsec, show that Australia still has some of the largest homes in the world, with the average floor area of a new dwelling topping 195m², up from 150m² just 25 years ago.
The average floor area of new, free-standing houses is 231m².
Our homes are much larger than those within Europe and even in many American cities.
It’s true that the average size of our new homes has fallen in recent years.
But this most likely reflects the change in product mix (more apartments), rather than a major shift in attitude.
Many of us still want large homes, even those downsizing.
Why has this occurred?
It comes down to economics.
The actual land component of a new dwelling is very high and fixed.
The land can cost as much as 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 $425,000 house and land package in Queensland could cost as much as $275,000.
In contrast, a 150m² three-bedroom base level house on that land would cost about $150,000 or around $2,850/m² as a total price (including the price of the land).
Now, a larger, 200m², four-bedroom house with a study might cost $200,000 to build.
The buyer gets 50m² or 25% extra house for just $50,000 more.
The end price for the house and land package is now $475,000.
But the total end price per square metre has now dropped to $2,375 or 17% less.
Here is the real rub.
Assuming that the buyer can afford to pay the extra deposit and fund a $475,000 house and land package, all it costs – assuming a ten percent deposit and using today’s mortgage rates – is an extra $7.50 per day in mortgage payments.
The new home buyer can now own a home that is 25% larger for just $50 per week.
To upsize the house, as outlined in the example above, would cost the buyer an extra $2,725 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 help keep land prices keen – building a larger house on a suburban block of land is often the better economic solution.
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