Have you ever wondered why smaller homes sometimes seem more expensive per square metre than larger ones?
And is using a square metre rate really a good metric to use?
Let’s delve into this, using a couple of analogies to make it easier to understand.
The Cake Analogy
Imagine you’re baking a cake.
If you’re baking one cake, you need one oven, one set of pans, and one batch of ingredients.
The cost per cake is relatively high because you’re covering all these costs for just one cake.
Now, imagine baking ten cakes.
You still only need one oven and one set of pans, but you can buy ingredients in bulk, which reduces the cost per ingredient.
The more cakes you bake, the lower the cost per cake becomes.
The Air Travel Analogy
Let’s consider air travel. Short-haul flights often cost more per kilometre than long-haul flights. Why is that?
It’s because airlines have fixed costs, such as airport fees, crew salaries, and aircraft maintenance.
For short-haul flights, these fixed costs are spread over a shorter distance, making the cost per kilometre higher.
Yet we never say “i’m not flying on short-haul flights because the cost per kilometer is too high” do we?
Economies of Scale and Fixed Costs in Home Building
Similarly, in home building, there are economies of scale and fixed costs at play.
Economies of Scale:
- Shared Infrastructure: Larger homes can spread the cost of essential infrastructure like plumbing, electrical wiring, and foundation over a larger area.
This means the cost per square metre for these elements decreases as the house size increases.
Fixed Costs:
- Essential Spaces: Spaces like kitchens and bathrooms are expensive to build, regardless of the overall size of the house.
In smaller homes, these spaces take up a larger proportion of the total area, increasing the overall cost per square metre. - Associated Costs: Costs, like Building Consents, engineer’s reports, Council Inspections are not based on a square metre rate. In smaller homes, you have less floor area to spread these costs against.
Total Build Price
Consider also, the total build price of the Home. A 30 square metre home is much less expensive to build than a 300 square metre home.
The 300 metre home could very well have a better square metre build cost, but that doesn’t necessarily make it affordable.
A Different Perspective: Return on Investment (ROI)
While smaller homes might be more expensive per square metre to build, they can offer a higher return on investment (ROI) for property investors.
For instance, a small, 30 square metre, one-bedroom home might be easier to rent out to students, workers or young professionals, fetching a weekly rental of $400.
This equates to a rental yield of $13.33 per square meter per week.
Larger homes, such as a 100 square metre, three-bedroom house, might be more challenging to rent out, especially in tough times.
Even if it commands a weekly rental of $700, the rental yield per square metre would be significantly lower at $7 per square meter per week.
In Conclusion
While you might simply look at the square metre rate and say “it’s more than I expected”, the reality is often more complex.
The fixed costs associated with essential spaces and the lack of economies of scale can make smaller homes more expensive per square metre to build.
However…
…their higher rental yield per square meter,
…less wasted space in hallways and entryways,
…and the TOTAL build price being LESS than larger footprint homes,
makes comparing square metre rates, not a very accurate measure.
There are numerous other benefits to small transportable homes (i.e. guaranteed fixed prices, speed of construction, minimal disruption on site) to consider too.
By understanding these factors, you can make more informed decisions about your housing choices and potentially earn more in the long run.