New research from property research firm Cotality has highlighted a significant mismatch in the Australian housing market. While the vast majority of Australian households comprise just one or two people (over 60%), most homes are built for larger families, typically with three or more bedrooms. This disparity between the size of homes and the number of households living in them points to inefficiencies in housing allocation, impacting affordability and access to suitable accommodation.

Eliza Owen, Cotality's head of Australian research, notes that around 40% of lone-person households are aged 65 and over, and two-person households are the most common, yet they often reside in three-bedroom homes. Conversely, one-bedroom and studio homes make up just 6% of Australia's housing stock. This means smaller households may have more bedrooms than they need, while traditional three- or four-person families might lack adequate space.

Data from the 2021 Census reveals there are more two-person households in three-bedroom dwellings (around 1.3 million) than three- or four-person households (around 1.1 million). This divergence underscores the urgent need to re-evaluate housing construction strategies and tailor them better to the changing demographic reality.

Market Signals

Sector Impacts and Opportunities: There is a growing demand for smaller dwellings, apartments, and townhouses, creating opportunities for developers and investors focusing on these segments.
Price Movements and Volatility: Smaller properties, particularly two-bedroom units, are showing strong performance in capital growth and rental returns compared to larger homes.
Competitor Positioning Changes: Developers solely focused on large family homes may face challenges in meeting market demand, while developers specializing in smaller residences can gain a competitive edge.

Winners & Losers

Winners: Developers building smaller apartments and units; investors targeting two-bedroom properties for higher rental yields; and renters seeking affordable housing options. Losers: Developers continuing to build only large family homes, and sellers of older, large houses who may take longer to find buyers or need to offer price reductions.

Action Timeline

Immediate: Opportunity to invest in small and medium-sized properties and capitalize on current demand and rising rental yields.
Short-term: Developers need to adjust their plans to include more smaller apartments and houses. Investors seeking capital growth should focus on these segments.
Long-term: Tax reforms, such as abolishing stamp duty and replacing it with a broad land tax, may be required to encourage individuals to move into appropriately sized homes.

Risk Assessment

Regulatory Risks: Planning regulations and zoning laws can hinder the development of medium- and high-density housing.
Market Volatility: The broader Australian property market is subject to economic fluctuations and interest rate changes.
Construction Cost Escalation: Continued increases in material and labor costs can impact the profitability of new developments and further strain affordability.

Key Indicators

Signals for Market/Industry: The mismatch indicates a shift in Australian household preferences towards smaller, more efficient living spaces.
Leading Indicators and Data Points: Rising demand for smaller properties, higher rental yields, and a slowdown in the construction of large homes are key indicators.

Regional Perspective

In Australia, this mismatch presents a significant challenge. Although most households consist of one or two people, the homes being built are typically larger. This situation creates an opportunity for developers to cater to the demand for smaller dwellings, potentially leading to improved land-use efficiency and better affordability.

Immediate Implications

What Happens Next: Demand for smaller dwellings is expected to continue growing, putting pressure on developers to increase supply.
Time-Sensitive Opportunities or Risks: There's an opportunity for property investors to capitalize on higher rental yields in smaller properties. Owners of large homes might face longer times to find suitable buyers.

What to Watch

Leading Indicators to Monitor: Monetary policy decisions from the Reserve Bank of Australia (RBA) regarding interest rates, construction approval rates, and rental market trends.
Expected Next Developments: An increase in the construction of smaller apartments and units, and potential tax policy changes to encourage the shift towards appropriately sized homes.

Analysis

Cotality's research uncovers a profound issue in the Australian housing market: an undersupply of smaller homes for smaller households. This trend will significantly influence construction and investment strategies in the coming years. Those who can adapt to this evolving demand will likely benefit from this market shift.