Food for thought - house sizes

　

MatusikMissive –Big homes

1stSeptember 2010 –http://www.matusikmissive.wordpress.com/

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 many who clog up the blogosphere with urban commentary do not understand the economics of new housing nor a rational buyer’s decison-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 150m²just 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/m²as 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 100m²of 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 cites, the trend towards larger new homes makes economic sense. Consumers are just acting in their own interests and are making rational decisons 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 thebest value for money.
Michael Matusik