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Decreasing Household Size


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I don't know why I've never thought this through properly before, but a bullish argument on property has often been that decreasing household sizes is a trend in itself and a cause of ever increasing demand for housing.

 

I think it might be the wrong way round, decreasing household size is actually a consequence of the number of houses growing relatively more than population.

 

[Household Size] = [Number of People Living in Households] / [Number of Households]

 

If household size is decreasing in a country with an increasing number of people, then the number of households must be increasing even faster than the old ratio.

 

It's even simpler to explain if you do the inverse;

 

1 / [Household Size] = [Number of Households] / [Number of People Living in Households] = [Households per Person]

 

So as Household Size gets smaller, there are more Households per person.

 

The only way for this not to be true is homelessness, i.e. when number of people living in households is not linearly related to the total population.

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I don't know why I've never thought this through properly before, but a bullish argument on property has often been that decreasing household sizes is a trend in itself and a cause of ever increasing demand for housing.

 

I think it might be the wrong way round, decreasing household size is actually a consequence of the number of houses growing relatively more than population.

A bit confusing perhaps...?

 

The Supply of Housing has increased because there has been a demand for it - ie People want to buy the new houses or rent them. If there was insufficient demand, then prices would fall below build costs, and builders will stop building.

 

The rising demand is coming from Household formations.

 

For years the size of the average household has been increasing, and that has meant that the number of households in the UK has been growing faster than population. Personally, I see this trend reversing. But thus far, it is merely an intuition that I have, and I can provide no evidence for it.

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A bit confusing perhaps...?

 

The Supply of Housing has increased because there has been a demand for it - ie People want to buy the new houses or rent them. If there was insufficient demand, then prices would fall below build costs, and builders will stop building.

 

The rising demand is coming from Household formations.

 

For years the size of the average household has been increasing, and that has meant that the number of households in the UK has been growing faster than population. Personally, I see this trend reversing. But thus far, it is merely an intuition that I have, and I can provide no evidence for it.

 

The fact that the housing was purchased shows that there was demand for it, but I don't know if it was core demand, people just taking advantage of there being more housing, or speculation. You can't form the household until there is a house to form it into, so the supply of housing should lead the household formations, which I guess is the risk that builders take.

 

Wouldn't proper 'pent-up demand' be seen in rising household sizes?

 

i.e. a bigger number shows more potential household formations per household and is further from the desired household size?

 

A household size of 3 has a household formation potential of 3 households of 1 person each.

 

A household size of 1 has reached the lower bound.

 

I'm still a bit confused and haven't resolved it in my head.

 

Edit to add - The lower the household size, the closer you are to exhausting demand?

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The fact that the housing was purchased shows that there was demand for it, but I don't know if it was core demand, people just taking advantage of there being more housing, or speculation. You can't form the household until there is a house to form it into, so the supply of housing should lead the household formations, which I guess is the risk that builders take.

 

Wouldn't proper 'pent-up demand' be seen in rising household sizes?

 

i.e. a bigger number shows more potential household formations per household and is further from the desired household size?

You need to distinguish between INVESTMENT demand, and actual HOUSING DEMAND, ie owner occupiers, or renters.

 

In the UK, there is much "pented up demand" from the social sector, that is people who want free or subsidised housing, and cannot pay for it themselves, but will take it if the government pays for it. Deamnd like that is virtually infinite, as is Investment demand in a bubble.

 

But the demand from people who want to house themselves and are willing to pay for it is limited by things like incomes and affordability. Clearly, in a weak economy, there is now a problem with this sort of demand.

 

People who want their own home but cannot afford it are forced to share with friends or family. And it is common in a recession to see household size increasing.

 

It reminds me that my father told me that during the depression when his own father could not get a job, my father family lived in a tent on my great grandfather's property, since there was not room inside the home. That's a good example of how economic downturns push up household sizes, and reduce household formations.

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