Covid-19 shrank household size, lifted prices

Australia’s shrinking household size accelerated during the Covid-19 pandemic, sending property prices and property rental prices skywards as dwelling supply struggled to keep up with the booming demand.

The most recent Census data revealed that the average number of people in each household has fallen to 2.5 people, from 2.6 people last Census.

In 2021, 70.5% of households were family households, while 25.6% were single-person households - that compares to 24.4% in 2016.

While that seems like a small decline, the reduction in household size equates to a significant increase in demand because, as we know, a smaller household size leads to the requirement for a larger number of households.

And all these households need somewhere to live.

The shrinking household size has acted to put more pressure on an already tight property market, creating a housing crisis.

Meanwhile, demand for detached property soared, especially in lifestyle suburbs, as homeowners looked for more space while working from home amid the Covid-19 pandemic.

More than ever before, a larger number of buyers were looking for larger properties and shying away from smaller units in inner-city areas.

Those living in one-bedroom apartments seem to want two-bedroom apartments.

Those living in three-bedroom homes seem to want an extra bedroom.

Everyone seems to need a Zoom Room nowadays, don’t they?

The change in demand created a bottleneck with the number of buyers looking for 3+ bedroom properties far outweighing the supply of that type of property - hence robustly strong and soaring house prices over the past couple of years.

Shrinking households is a broader trend

Shrinking household size is part of a broader trend of an ageing population combined with couples forming and having children later in life.

The Census data also shows that 3-person and larger households have declined as a proportion of households.

Meanwhile, the proportion of couple households has remained steady and single-person households have risen to 25.56%, from 24.42% in 2016.

At the same time, the AFR notes, the proportion of 4-bedroom or more homes has increased by over 2% to 34.8%, far higher than the rise in 1-bedroom homes.

This data suggests that PowerHousing Australia told the AFR, that the type of housing that Australia is supplying is “out of whack with what is needed”.

Rental vacancy rates have plummeted

Vacancy rates across national dwellings fell to a record low of 1.2%, down from 2.2% this time last year, led by falls in available rental properties across all cities except for Canberra, where vacancies lifted marginally to a relatively tight 1.1%, according to the latest Corelogic data.

This has forced rent prices to be 9.1% higher across the capital cities and up 10.8% in regional areas compared to June 2021.

And the shortfall in rental supply levels has placed considerable pressure on the market, with rental listings in June -34.0% below the country’s long-term average for this time of year.

And as overseas migration picks up, it’s likely rental demand will continue to increase; however, affordability constraints may eventually limit the rate of growth.

“Despite growing affordability concerns, rental markets are expected to remain tight for some time yet partly due to a shortage of supply following a long period of low l investment activity between 2015 and 2021, but also due to renewed rental demand as international migration recovers,” Corelogic Research Director Tim Lawless said.

“Worsening affordability could have a negative impact on rental demand as more people try to minimise costs by maximising occupancy rates or reforming larger households.

“However, this will likely be offset by additional rental demand as international migration returns to pre-Covid levels.”

A word of warning

It is a bleak time for tenants facing short supply and higher prices as the rental crisis continues to deepen, particularly in our capital cities.

And while property investors can look forward to rising rental returns, it’s important to remember that as an investor, your future income is dependent upon your tenants’ abilities to pay you increasing rent over time.

That’s why it’s important to own properties in the right suburbs - those where tenants will be able to afford higher rents over time rather than suburbs where the tenants are only a week or two away from going broke.

In general, these will be locations where tenants are aspirational and have a good income, and are likely to have increasing income over time so they can pay you more rent.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.