Why more renters now prefer smaller units over larger houses

Recent analysis shows the pandemic-era trend towards bigger homes is reversing, with people now looking for and choosing to rent smaller properties.

Demand for larger properties and homes further from cities surged during the pandemic, as people sought homes better suited to remote work and changed lifestyles.

But more recent data on rental prices, searches and lease times show that renters have reverted to seeking similar homes as before the pandemic.

Units are now leased faster than houses

During the pandemic, as borders closed and CBDs shut down, the number of vacant rental units in inner-city areas rose substantially.

People also had an increased desire for space and larger homes which caused demand for smaller properties to decline.

This is evident when we compare rental days on market for houses and units in November 2020. Units were on the market, on average, for five days longer than houses.

But three years on, this no longer appears to be the case.

Rental demand has increased significantly following the pandemic but the typical time it takes for units to be leased has decreased significantly more than houses.

Units are now leasing 36% faster than in November 2020, whereas houses are leasing 9% faster. Units are also on market for fewer days than houses, reflecting a heightened level of demand for units that extends beyond the recovery in inner-city markets.

A similar story is apparent when we look at search data.

Renters are now searching for units more than houses

In late 2020 when the pandemic was still affecting everyday life, there were many more searches on realestate.com.au for houses than units.

Houses accounted for 56% of all rental searches, whereas units only accounted for 44%.

The transition to remote working steered renters towards houses, which are typically larger and better able to accommodate for the increased need for space and privacy.

However, in late 2021 and early 2022, when most restrictions were lifted, there was a shift in the trend which has persisted to the present day.

More people are now searching for units. The unit share of searches has risen by 10 percentage points over the past three years which suggests that people are now valuing different attributes in a home.

Not only are renters seeking out units more, but they are also less willing to pay a premium for houses.

The price gap between houses and units has reduced since the pandemic

The price differences for different types of home are good indicators of relative renter preferences. When these differences, or premiums, increase or decrease, it often reflects changing preferences.

Back in 2020, the premium to rent a typical house compared to a typical unit close to the CBD in our largest cities was about 27-28% in Brisbane and Melbourne, and 25% in Sydney.

These figures trended upwards in 2021, and peaked in early 2022, with the premium in Melbourne approaching 40% during this time.

This suggested a strong preference shift towards houses, with people willing to pay a lot more to live in larger homes.

But the trend has changed in recent times.

Renters are no longer paying the steep premiums for houses seen at the beginning of 2022. In fact, premiums in Sydney are now below pre-pandemic levels, while in Melbourne and Brisbane, premiums have returned to similar levels seen before the pandemic.

This reflects an increasing preference for units compared to houses in these capitals.

Although more renters are favouring units, it is key to understand what is driving this change.

Why are more people preferring units to houses?  

Following the reopening of offices and in-person work, living within close proximity to CBDs has regained importance.

Units not only tend to be located closer to public transport and in inner-city areas, but are also cheaper to rent compared to houses in similar areas.

For these reasons, it is unsurprising that units, particularly those in inner-city areas, are growing in popularity among renters.

Another drawcard for units is a higher proportion of vacancies. The vacancy rate for houses is 0.9%, whereas 1.6% of units are currently available for rent.

This means that renters have less competition and more options if they choose to rent units over houses.

What comes next?

The change in preferences has caused unit rent prices to increase more than house rents in the past few years. As hybrid working becomes the norm and cities revert to their pre-pandemic state, unit demand may continue to rise.

However, the cost of living crisis is turning renters to share housing for more affordable options. As houses are likely to have more rooms, demand for larger homes could also see a resurgence.