New Zealand used to be a land of quarter-acre sections and airy four bedroom bungalows. But house prices, shifting demographics and changing lifestyles have brought an end to those dreamy days for all but the wealthy (or those lucky enough to have bought years ago).

We’re living in increasingly smaller homes and townhouses, while terraces and apartments now make up a much larger proportion of our housing stock.

Why the change? Does smaller mean worse? And do these smaller homes perform well as investment properties?

New Zealand’s shrinking housing stock

In 2010, the average New Zealand home had a floor area of 200 square metres, according to Statistics NZ. Just nine years later, that average had shrunk to 158 square metres.

That rapid change can be explained by a few key shifts in the way Kiwis live and how our property market functions.

For one, we’re having kids four to five years later than we were in 1980, so we can get away with having fewer bedrooms.

We’re also getting married eight-to-nine years later, and one-person households are now the fastest growing type of household in the country.

In fact, Statistics NZ forecasts the number of single-person households will increase from 390,000 in 2013 to 580,000 in 2038, eventually accounting for 27 per cent of all homes.

House prices are a big one too. Back in 2010, the median home in New Zealand would set you back NZ$350,000, so why wouldn’t you buy a four-bedroom home on a quarter acre?

Today, the median home in NZ costs NZ$795,000, and NZ$1.15 million in Auckland. One beddies are starting to look pretty good to me.

Last but not least, population growth is a major driver behind our shrinking floor plans – we’re simply running out of room to put people near our major centres.

When smaller means better

In many ways, smaller homes can offer a better, simpler, more affordable lifestyle.

Nigel King sells apartments for a living through his company Uptown Apartments – and he knows a thing or two about the benefits of living smaller.

“If you’re busy, an apartment’s much better. There’s almost no maintenance, everything’s done for you by the body corp, and the building manager takes care of all your problems,” King says.

King isn’t just selling apartments either, he lives in an apartment development in Eden Terrace called Citizen. He reckons it comes down to location.

“You try buying a big home in a location where you can walk to everything you need and you’ll spend millions.

“With an apartment, even first-home buyers can buy in those city fringe suburbs where everyone wants to be.”

If you buy a new apartment, townhouse or terraced home by a quality developer, you’ll also have the benefit of brand new appliances, immaculate finishing and excellent acoustics and insulation.

That means a warmer, quieter home that’s easier to live in – for less.

Smaller home, bigger returns?

Lifestyle and comfort are important when buying a house, but so is money. After all, for most people, their home is the biggest purchase they’ll ever make.

With that in mind, do smaller homes make good investments?

Westpac analysed CoreLogic data and found that apartments made less capital gains than units and small homes in Auckland and Wellington:

The type of property you buy may influence your capital gain, but Ed McKnight, Informed Investor’s property economist, says the size of the section won’t neccesarily affect it.

“There’s no statistically significant evidence that land size influences capital growth. Whether it’s 800 sqm or 200 sqm doesn’t necessarily matter.”

On the other hand, smaller homes, apartments and townhouses generally have better rental returns compared to large properties, he says.

“Tenants tend to value things like bedrooms and location, but not necessarily outdoor areas.

“You may pay a few hundred thousand more to get a larger section, for example, but you won’t necessarily get much more rent.”

This makes smaller properties easier to hold long term because their rental income will usually cover a larger proportion of the mortgage than larger properties.

There are some drawbacks, though, says McKnight.

“The ability to renovate and add value is usually less in townhouses and apartments. And you’ve got other costs to consider, such as body corporates.”

That said, McKnight reckons with a little due diligence and forward thinking, you can reduce the impact of these factors.

“When you’re buying, watch out for things like gyms, pools, and other additional services. These can significantly increase the cost of body corporate, but tenants won’t necessarily pay more rent to have them.

He suggests you have your lawyer take a close look at the body corporate’s minutes.

“Look for evidence that any remedial or structural work needs to be done in the future. This can be expensive.

“You also want to make sure the body corp has a good sinking fund in place in case work does need to be done – if it doesn’t, you may have to pay.”

When good things come in small floorplans

Whether or not you like smaller homes – apartments, terraces and little two-bedroom standalones – they’re here to stay.

In fact, McKnight says with Auckland’s population set to grow by 33 per cent in the next 10 years, this trend will only continue.

“Walk down the street in Auckland and imagine for every third car and person, there will be another one. Auckland is already sprawling, we simply need to see more intensification to keep up.”

Other Kiwi cities are growing and intensifying at a slower pace, but they’re all heading in the same direction.

It’s looking like the homes of the future in New Zealand are only going to continue shrinking – do we really need all this space, anyway?