Unpacking the Rise in Property Demand: Is Household Size a Factor?

The Australian property market is witnessing a significant shift driven by the steady decline in Average Household Size (AHS). From an average of 2.9 individuals per household in the mid-1980s, the figure has dwindled to around 2.5 since the early 2000s, and further below in the years after the pandemic. This reduction in household size has been a key factor in increasing housing demand, as more living spaces are required to accommodate the same number of people.

The pandemic initially saw household sizes grow as young adults returned to their family homes during lockdowns. However, this trend reversed as soon as late 2020, with a newfound preference for personal space and the rise of remote work leading to an even greater decline in AHS. Despite slower population growth due to reduced migration, the property market remained resilient, buoyed by the increased demand in smaller households.

The dynamics of household downsizing

The decline in household size in Australia can be traced historically through a shift towards smaller family units, with the AHS reducing from 4.5 people in 1911 to about 2.5 in 2021.

Over the last few decades, family composition in Australia has undergone significant changes. There has been a noticeable decline in families with dependent children and a corresponding increase in couple-only families, especially among older couples. In 2021, couples without children constituted 39% of all families, with the number of such families with a female partner aged 65 and over rising from 26% in 1991 to 36% in 2021. These trends are indicative of broader societal shifts, including greater individualism, economic factors, and the diversification of family structures, such as the rise in one-parent families, step- or blended families, and the increasing proportion of same-sex couple families, which has grown from 0.3% in 1996 to 1.4% in 2021.

Shrinking households reshape the property landscape

The trend of smaller household sizes will have a significant impact on the housing market. As Australian households continue to age and millennials become a major player in the property market, there is a growing demand for smaller housing units. With more one and two-person households, there is a need for more single-person or small-family dwellings. Developers and investors need to take this into account when planning future developments. The supply of smaller dwellings will need to meet the changing needs of the population, and this could potentially lead to a shift in the types of properties being built.

The increase in smaller household sizes can also have an impact on rental yields. One-bedroom units are often more affordable to purchase compared to larger properties, which makes them attractive to investors. As mentioned before, the shrinking household size will push more demand towards the smaller housing configuration, further increasing rents. A combination of affordable prices and high weekly rents will result in higher rental yields.

The latest data already points to a higher rental yield for smaller dwelling configurations. In Sydney and Melbourne, one-bedroom units consistently have higher rental yields compared to larger configurations. Investors who recognise this trend and invest in smaller properties may benefit from higher rental returns.

Investment opportunity amidst the shifting demographics

The landscape of the Australian property market is closely intertwined with the demographic shifts towards smaller household sizes. The historical trend of decreasing AHS, driven by an ageing population, a rise in childless couples, and a broadening array of family configurations, is creating a sustained demand for smaller living spaces. This demand is not only filling existing homes but also spurring the construction of new dwellings tailored to the needs of smaller households, such as one-bedroom units and studios, which are becoming increasingly popular.

The shift towards smaller dwellings is expected to continue, potentially leading to a reconfiguration of the housing supply to better align with the changing fabric of Australian society. Developers and investors are now presented with the opportunity to cater to a burgeoning market segment that prioritises smaller, more manageable living spaces that align with the lifestyle choices and financial capabilities of an ageing demographic, single-person households, and non-traditional family arrangements. This could prove to be a strategic move in navigating the evolving real estate market