How do household formation rates affect property?

The biggest driver of demand for residential property is the household formation rate, according to Property Planning Australia (PPA).

The household formation rate is the rate at which new households are formed, and as the household formation rate increases, it places upward pressure on rents and property prices.

PPA noted that new households are created as a result of a number of factors:

  • Overseas migration: High levels of overseas migration increases demand for property as most migrants have to create an extra household. Generally newly arrived migrants will rent for two to three years before getting residency and buying a property. International students are also creating demand for rental property.
  • Interstate migration: Some states benefit from this more than others. 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. If they don’t leave home to either rent or buy, they’re not creating a new household, which in turn lessens the demand for property.
  • Couples setting up house: Less people are committing to each other, which makes it difficult to purchase a property as generally it takes more than one person's income to be able to afford mortgage repayments. This lessens the demand for property.
  • Divorces and separations: The size of the average household has fallen from an average of 4.5 people in 1911 to 3.55 people in 1961 and 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, two homes are required, which places more demand on property.
  • Older people remaining independent: The other cause of smaller households is older people choosing to stay at home rather than going into an aged care facility, which creates demand for extra residences.