Firstly, a definition.
The household formation rate is the rate at which new households are formed. New households are created as a result of a number of factors including:
- Overseas migration
- Interstate migration
- Adult children leaving home
- Couples setting up house
- Divorces and separations
- Older people remaining independent
Our overseas migration levels are well above the 30 year average. High levels of overseas migration increases demand for property as most migrants have to create an extra household (unless they are going to live with relatives in an existing household). Generally what occurs is that newly arrived migrants will rent for two to three years, apply and gain Permanent Residency and then they start looking for property to buy.
In addition to overseas migrants, international students are also creating demand for property, especially in our capital cities.
Some states benefit more than others in the case of interstate migration. Most interstate (and overseas) migration occurs as people are seeking employment opportunities. Currently Western Australia and Queensland are experiencing high levels of interstate migration whereas Tasmania is experiencing a net loss; more people leave Tasmania for other states than settle in Tasmania from the other states. Most interstate migrants who are making a permanent move will rent for up to 12 months, and then search for property to buy. Based on interstate migration levels, demand for property is highest in Western Australia, Queensland and Victoria.
Adult Children Leaving Home
Adult children are not leaving home at the same rate as they used to. Reasons for this include studying longer, renting/buying property is perceived to be unaffordable and life is great home! Why leave? If they do not leave home to either rent or buy, then they are not creating a new household which in turn lessens the demand for property. At the moment, the low numbers of adult children leaving home is having a negative impact on the demand for property.
Newly Married Couples
In the modern era, less people are getting married or committing to each other. This makes it difficult to purchase a property as generally it takes more than one person’s income to be able to afford the mortgage repayments on a home. Unless single people are earning a high salary, their chances of being able to buy property on their own salary are vastly diminished, which in turn lessens the demand for property.
Divorces and Separations
The size of the average household has fallen from an average of 4.5 people /household in 1911, to 3.55 people in 1961. Currently, less than 2.5 people live in an average household. The main reason behind smaller households is the ever increasing divorce and separation rate. One family used to live in one household but after the divorce, the original family now requires two homes. If this rate of increase continues, it will place more demand on property.
The other cause of smaller households is older people choosing to “age in place”. That is, they don’t wish to live their last few years in an aged care facility but want to stay at home and utilise support services such as Meals on Wheels, Royal District Nursing Service. With many older citizens choosing to stay in their existing residence, this creates demand for extra residences.
So what are the implications for property investors?
- High overseas migration/international student numbers – increases demand for rental property.
- Interstate migration – dependent on the state/territory your property is in.
- Adult children leaving home – if adult children do leave home, most of them have to rent, which in turn increases demand for rental property.
- Less couples setting up house – decreases demand for property.
- Divorces and separations – increases the demand for rental property.
- Older people remaining independent – increases demand for property.
In conclusion, the biggest driver of demand for residential property is the household formation rate. As the household formation rate increases, it places upward pressure on rents and property prices.
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