“There are still McMansions being built, but there are far fewer of them,” he said.
Mr James said although sizes are falling, Australia still enjoys the second-largest house size in the world, trailing only the US.
“Houses built in Australia are still far bigger than those built in the 1980s and 1990s. They are 25 per cent bigger than 30 years ago,” he said.
The report, based on Australian Bureau of Statistics data, also shows demand for new housing in outer-suburb city developments is falling, with many generation Y and Millennial buyers preferring to live closer to work – rather than experience a traditional one-hour commute – cafes, restaurants and other inner-city amenities.
Martin North, principal at consultancy Digital Finance Analytics, said the demand profile for housing was changing with big implications for builders and outlets that supply fixtures and fittings.
He said rapidly rising city house prices and an increase in the cost of labor and materials to build was forcing many more people into “building for price” with smaller homes.
“Household expenses are increasing more than wages and confidence in the economy is sagging, leading to buyers adopting a much conservative approach to building,” he said.
He said the data has significant implications for property developers, builders, building material companies and retailers, who all rely on industry expansion to maintain growth.
“The average room size is falling, which means people are buying less in the way of fixtures, fittings and appliances to fill them,” he said.
“The construction sector is under pressure, new home approvals are trending down and building firms are failing.”
Official statistics released last month showed that in 2018-19, 556 construction companies went under in NSW alone — 101 more than the same period a year earlier.
Angela Lillicrap, economist at the Housing Industry Association, said there were some encouraging signs that the worst may be over for struggling developers and builders.
She said new-home sales bounced back in September to return to levels seen during the latter half of 2018.
“Sales increased for the second consecutive month by 5.7 per cent,” Ms Lillicrap said.
“And the value of owner-occupier home loans rose a better-than-expected 3.2 per cent in September, to be up by 5.6 per cent over the year – the strongest annual growth rate in 20 months.
“Hopefully, these data signal that the worst is over for the construction industry and help builders get back on their feet.”
Mr James said lower interest rates and increased supply of cheaper apartments and townhouses, coupled with government downsizing incentives that allow $300,000 of existing house sale proceeds to be placed into superannuation, had also prompted older couples to sell their existing homes, which would continue to fuel additional demand for smaller houses.
“With the average number of people in homes also falling and the population rising, there is on-going need for a greater number of smaller homes to be built,” he said.
Stephen is Investment Editor at The Age and Sydney Morning Herald. He writes about personal finance issues and markets as well as editing Money.