Australians love big houses, and most grew up in one. If you asked 100 people on the street, most would tell you that they grew up in a four-bedroom house with two bathrooms. This history is why many people are still buying big houses today.
After all, they are buying a memory of architecture.
But it’s not what potential tenants want!
That’s what Kelly and Liam discovered with I Love Real Estate.
When they started their investing careers, Kelly and Liam thought that buying larger houses was the way to go. But that wasn’t going to work for the properties they owned in North Queensland. They’d purchased the properties at the top of the mining boom but soon found themselves struggling to find tenants.
But it wasn’t because there was a shortage of tenants.
Rather, it was because they weren’t offering what the tenants wanted. The market demanded small furnished spaces, not a four-bedroom house with two bathrooms.
So, they settled on a strategy of dividing that large property into separate rooms. Each of those four rooms rents out for about $150, which creates a passive revenue stream of $600 from the entire property.
They’re now serving the needs of their tenants because they’ve escaped the idea that Australians only want big houses.
The big house trend started decades ago and continues to this day. Is it still the right choice though? Will the big house survive into the future? Or will smaller housing take over?
Let’s see how things work in the business world, which real estate is a part of, before we dig deeper. To better illustrate this, let’s take something everyone loves – ice cream – as an example.
Most people would agree that vanilla is the most popular ice cream flavour. Who doesn’t like it? But for this experiment, let’s say that it makes up 60% of the market. The second place goes to chocolate at 30%. And all other flavours occupy the rest of the market share.
But what has ice cream got to do with real estate?
Back in 1929, Kingsley Zipf formulated what became known as Zipf’s Law. He said that once a product secures the number one spot on the market, nothing can ever replace it. It doesn’t matter how hard they try, either, unless something comes along to disrupt and redefine the market.
This disruption is the only way to become number one.
In 1999, Nokia was the vanilla of the mobile phone market and Blackberry was chocolate. Today, the iPhone is vanilla and Samsung chocolate. And when it comes to automobiles, BMW and Mercedes are the likely candidates for the top spots among German car enthusiasts.
Back to Australia and real estate.
A four-bedroom house would be the vanilla ice cream in this case – it is, by far, the most popular. And a three-bedroom home would be chocolate.
But in that setting, smaller and smarter housing can become cookies and cream at best. That’s despite Australia having the most unaffordable housing costs in the English-speaking world.
The only way for smaller housing to become the new vanilla is through market disruption.
Now, let’s go back to the 1960s and the Baby Boomer generation (born 1945 to early 1962). It’s the generation born after the war, and there were 4.1 million Baby Boomers in Australia at that time.
The first Baby Boomers back in 1965 were different from their parents of the silent generation. Opposed to their parents, Baby Boomers wanted to go places and do things.
Also in that same year, the average family of five lived in 85sqm homes. And then, A.V. Jennings created the first display home. It was 130sqm and everyone thought that it was a waste of space. But interestingly, it was Melbourne’s number one attraction.
The Baby Boomers also started with about the same amount of money. But 30 years later, 20% of the Boomers had 80% of the money – the same thing happening today with the Millennials.
In the mid-1960s, plenty of Baby Boomers were already getting married at 18 or 19. Just a few years in the workforce and they were ready to start families and have kids of their own. Also, they were already buying their first homes.
Unfortunately, many of the Baby Boomers had divorced by 1995. Some of them remarried younger partners and had more babies. As a result, this created the largest number of blended families in the history of Australia.
Millennials are now growing up and entering the real estate market. But the thing is, they don’t want vanilla or chocolate. They want something else.
The overriding problem is that everyone buys a memory of architecture. For example, the Swedes have high pitch roofs that make snow fall off in the winter. The Asians, on the other side, have 45sqm rooms that they share with several other people.
Back in the 1960s, a Baby Boomer who bought a house for $18,500 was considered wealthy for being able to afford such a nice house. This was in comparison to most of their peers who bought $5,000 homes.
Nevertheless – at least for one of them – the value of their home rose over the years and they were able to sell it for $3.7 million.
And there are countless other such stories out there.
In fact, the Baby Boomers were the first generation to stop looking at the house as a shelter. They began considering it as a commodity that they could invest in and sell at a profit. And they were also the first generation to treat buying and selling houses like shares in the market.
The driving force behind their investments was the belief that houses will increase in value over time. And so, they would be able to profit when the time comes to sell.
The mantra was to buy today and hold onto it because it’s going up.
And everything was well until the late 1990s – that’s when this model failed. Land prices went up 600% from 1999 to 2007 and took the model with it.
The old concept of four bedrooms and two bathrooms in a 200sqm house isn’t going to work for everyone. There are 12 million vacant bedrooms in all of the four-bedroom houses in Australia today. Australians are buying a memory of architecture.
But where is the logic in that? The Baby Boomers are building big houses as a form of investment. Fair enough.
The problem is that this logic doesn’t bring cash flow. All that one can do is build such a house and hope that it will go up in value.
But home prices are peaking right now.
So, it is better to turn to the more sensible and smaller housing. That’s because you can get plenty of cash flow with smaller homes through renting. Also, such homes are easier to sell and to generate capital growth.
A big, roomy house might be worth a million, but it’s very hard to sell.
Finally, if you don’t want to be cookies and cream for the rest of your life, you need to reinvent and disrupt the market.
The four-bedroom myth started with the Baby Boomers and it was their vanilla ice cream.
But today’s younger generations want something else. They want smaller and smarter living. They want smaller houses.
Why?
A smaller house can generate cash flow through rent. Also, it’s easier to sell a smaller house for a capital gain.
Now is the perfect time for you to go small.
JG