Housing Under-Utilisation in Australia: 13 Million Spare Bedrooms and the Shortage Beside Them

Written by Christopher Hall, AdvDipFP | Authorised Representative, AFSL 526688 | June 2026

Housing under-utilisation describes homes that have more bedrooms than the household living in them regularly needs. In Australia it is widespread: about 76.8% of households — roughly 7.4 million homes — have at least one spare bedroom, adding up to an estimated 13 million spare bedrooms nationwide (ABS, 2021). That those spare rooms sit alongside a genuine housing shortage is not a contradiction. It points to a second feature of the market: the problem is partly about how the existing stock is allocated, not only about how many new homes get built.

This article looks at that allocation question and where it connects to the wealth Australians hold in property. Arrow Equities does not call the property market up or down — the housing data here is context. The point that matters for households is narrower and structural: the same tax settings that concentrate investment-property ownership in a small group of owners also reduce the incentive to move family-sized homes, so supply is held tight from two directions at once.

What is housing under-utilisation?

A bedroom is counted as "spare" when a home has more bedrooms than the household needs for its standard sleeping arrangements. On that measure, Australian housing is heavily under-utilised. The 2021 Census recorded 10.85 million private dwellings, of which about 9.81 million were occupied on Census night; more than three-quarters of those occupied homes had at least one spare bedroom (ABS, 2021).

The spare capacity is spread broadly rather than concentrated in a handful of mansions. Roughly 3.2 million households have one spare bedroom, about 3.1 million have two, and around 1.2 million have three or more (ABS, 2021). Looked at from the other side, only about 3% of households reported needing an additional bedroom (ABS, 2021) — so the country has vastly more under-used rooms than over-crowded ones. The 13 million spare bedrooms that result are, in aggregate, more sleeping capacity than the combined populations of Australia's two largest cities.

How can Australia have a housing shortage and 13 million spare bedrooms at once?

Both things are true at the same time because they describe different problems. The shortage is a question of how many homes exist relative to the people who want them; under-utilisation is a question of how the homes that already exist are occupied. A market can be short of homes overall while a large share of its bedrooms go unused.

Part of what drives the gap is that households have shrunk while houses have grown. The average Australian household has fallen from around 2.9 people in the early 1980s to about 2.5 today (RBA), even as new homes have tended to be built larger. Family-sized homes built for four or five occupants are increasingly lived in by one or two. The pattern is most pronounced among older owner-occupiers: more than three-quarters of homeowners aged 74 and over have at least one spare bedroom, compared with fewer than two-thirds of those aged 55 and younger (ABS, 2021).

None of this means under-utilisation is the cause of the housing shortage, or that freeing up spare rooms would resolve it. Construction rates, migration, interest rates, land supply and planning all act on the market together. Under-utilisation is one structural feature among several — and the one that connects most directly to the tax settings examined next.

Why does so much family-sized housing stay under-occupied?

A home that is under-occupied on paper is often being used in ways the bedroom count does not capture — a home office, a room kept for visiting family or grandchildren, or space for a carer. Staying put in a long-held family home is, for many older Australians, a rational financial decision rather than anything to be criticised; why retirees stay in the family home — and what it costs looks at that same decision from the household's side. The honest framing here is an allocation problem, not a story about any group "hoarding" houses.

What the data does show is that several policy settings reduce the financial incentive to move family-sized stock. Four are worth naming, as factual features of the system:

• The Age Pension assets test exempts the principal home. The family home is not counted as an assessable asset for the Age Pension, regardless of its value, while savings and investments are (Services Australia, 2026). A high-value home can therefore be held without affecting pension entitlement in a way that an equivalent sum invested elsewhere would.

• The principal residence is generally free of capital gains tax. The main residence exemption means a family home can generally be sold without capital gains tax on the increase in its value (ATO, 2026) — a benefit that does not apply to most other assets, and one that rewards holding the home.

• Stamp duty is a transaction cost on moving. Transfer (stamp) duty charged by state and territory governments adds a substantial one-off cost to buying a different home, which weighs against downsizing even where it would otherwise suit.

• Suitable downsizer stock is limited. Smaller, well-located homes that an owner might move to are not always available in the same area, so the practical option to downsize is narrower than the headline numbers imply.

Each of these is a factual policy setting rather than a judgement about behaviour. Together they mean family-sized housing changes hands slowly, which tightens the supply of larger homes from the owner-occupier side.

The supply squeeze from two directions

This is where the under-utilisation picture meets the rest of Australia's property settings. The same architecture that locks up family-sized stock also concentrates ownership of investment housing. About 2.27 million Australians hold an interest in a residential investment property, yet around 70% own just one, while the minority who hold several together own close to half of all investment housing (ATO, 2021–22; RBA, 2026). The full distribution sits in who owns Australia's investment properties, and the personal side of that — the personal risk when wealth is concentrated in property — is its companion.

So the architecture is doing two things at once. The capital-gains-free family home, the pension assets-test exemption, negative gearing and the way superannuation has been able to hold geared property all channel capital toward property — concentrating investment ownership in a relatively small cohort while locking up family-sized homes with owner-occupiers who have little tax reason to sell. The market is inelastic from two directions: new supply is slow to build, and existing stock is slow to change hands.

That matters because a tightly held market is a sensitive one. As how small shifts in migration move house prices shows, when supply cannot adjust, a modest change in demand can move prices a long way in either direction. The same logic applies to the tax settings above: a change touching even a "small" share of buyers or owners meets a market already held tight from both sides. This is an argument about sensitivity, not a forecast of direction — Arrow Equities draws no conclusion about which way prices will move. What it does mean is that a great deal of household wealth is parked in an asset that is large, illiquid and exposed to forces the owner cannot control. For households thinking about that wealth, the broader picture is set out in the protecting the wealth held in property hub.

What an under-utilised family home means for the wealth inside it

For an owner-occupier, an under-utilised family home is usually the single largest store of wealth the household holds — and one of the least liquid. That illiquidity is the point at which this national story becomes a personal one.

Christopher Hall, AdvDipFP, Authorised Representative, AFSL 526688, has completed more than 500 life insurance policy reviews for Australian families. In his experience, the family home tends to function as the eventual funding source for the later stages of life: it is held through retirement, then sold to pay for a move into retirement living or aged care, with the proceeds covering in-home support and ongoing care costs. The sale is, in effect, a planned liquidity event — one that arrives at the least flexible moment, often when health and timing are already under pressure rather than chosen.

The risk most households can actually manage is not the property cycle but the prospect of that sale being forced early — by a death or a loss of income — rather than made on the owner's own timetable. Because a property cannot be sold in part, any sudden need for cash tends to require a full sale, frequently at an inopportune time and with tax and timing consequences attached. Christopher Hall observes that households approaching retirement often hold a large share of their wealth in one to three properties and underestimate exactly this flexibility risk. The personal side of that picture — what staying in the family home costs a retiree — is the companion to this national one.

Life, total and permanent disability (TPD) and income protection cover answers that risk directly: the proceeds can clear or service debt and replace lost income, so an illiquid property position can be kept rather than sold under pressure. How the cover is owned matters too — life and TPD premiums can often be funded through superannuation to preserve household cash flow, while income protection held personally may, depending on individual circumstances, be claimable as a tax deduction; both are points a qualified adviser can confirm for a specific situation. For older owners whose home is the planned funding source for the costs of aged care, making sure that protection is sound — before circumstances force the decision — is the practical step within reach. None of this is a reason to hold or sell any particular asset. Households in this position may wish to speak with a life and TPD insurance specialist about their individual circumstances.

Remember that past performance is no guarantee of future results, and all investing and borrowing involve risk.

Frequently Asked Questions

Why don't more older Australians downsize from large family homes?

Several factual policy settings reduce the financial incentive. The family home is exempt from the Age Pension assets test regardless of value (Services Australia, 2026) and is generally free of capital gains tax (ATO, 2026), while stamp duty adds a large one-off cost to buying a different home, and suitable smaller homes in the same area can be scarce. Staying put is often a rational decision, and spare rooms are frequently used for family, work or care. The result is described as an allocation issue, not a criticism of any group.

Is the family home counted in the Age Pension assets test?

No. The principal place of residence is an exempt asset under the Age Pension assets test, regardless of its value, while financial investments and other property are assessable (Services Australia, 2026). This is one reason a high-value home can be held without affecting pension entitlement in the way an equivalent investment portfolio would. How the test applies to an individual depends on their full circumstances, which Services Australia or a qualified adviser can confirm.

Is the family home subject to capital gains tax in Australia?

Generally no. The main residence exemption means a family home can usually be sold without capital gains tax on its increase in value (ATO, 2026). The exemption can be reduced in some situations — for example where the home has been used to produce income or sits on a large parcel of land. Because the rules depend on individual circumstances, a qualified adviser or accountant should be consulted before relying on the exemption in any specific case.

Does reducing spare bedrooms solve Australia's housing shortage?

Not on its own. Under-utilisation is one structural feature of the market, but the shortage is also shaped by construction rates, migration, interest rates, land supply and planning, which act together. Freeing up under-used rooms could ease pressure at the margin, but it is not a single solution, and the policy causes of under-utilisation are debated. The figures describe the current allocation of housing, not a prediction about how the shortage will resolve.

What is the average Australian household size?

The average has fallen from around 2.9 people in the early 1980s to about 2.5 today (RBA), even as new homes have tended to be built larger. Fewer people living in bigger homes is a central reason the country has so much spare bedroom capacity — an estimated 13 million spare bedrooms across roughly 7.4 million households on 2021 Census data (ABS, 2021).

What happens to the wealth in a family home if the owner dies or can no longer work?

Because a home cannot be sold in part, a sudden loss of income — through death or disability — can force a full sale at the wrong time to release cash, often with tax and timing consequences. Life, TPD and income protection cover can supply that cash instead, clearing or servicing debt and replacing income so the property can be kept rather than sold under pressure. The appropriate cover and structure depend on the household's debts, income and circumstances, and are best confirmed with a qualified adviser.

How can homeowners protect the wealth tied up in a family or mortgaged home?

The usual approach is to make sure life, TPD and income protection cover is sized and owned so that the debt and income behind the property are protected if an owner dies or can no longer work — removing the trigger that forces an illiquid asset to be sold at the wrong moment. Reviewing existing cover against current debts and circumstances is the typical starting point, since cover taken out years earlier is often misaligned with today's position. Individual situations vary, and a qualified adviser can confirm what applies.

Book a quick review with an adviser

Book a quick review with an adviser now. For households whose wealth is concentrated in a family home or investment property, a coverage gap assessment checks whether existing life, TPD and income protection cover is enough to clear or service the debt and replace income if an owner dies or can no longer work — so an illiquid property need not be sold under pressure.

Find out if you're eligible →

About the Author

Christopher Hall, AdvDipFP, is the principal financial adviser at Arrow Equities and an Authorised Representative under AFSL 526688. He has completed more than 500 life insurance policy reviews for Australian families, with a specialisation in life risk insurance.

Bibliography

#	Source	Type	Date
1	Australian Bureau of Statistics — Census of Population and Housing (~13 million spare bedrooms; ~76.8% of households / ~7.4 million with ≥1 spare bedroom; 3.2m one / 3.1m two / 1.2m three or more; only ~3% need an additional bedroom; spare rooms more common among owners aged 74+; 10.85m dwellings, 9.81m occupied)	Tier 1 — regulatory	2021
2	Reserve Bank of Australia — household-size trend (average household ~2.9 in early 1980s to ~2.5 today)	Tier 1 — institutional	n.d.
3	Australian Taxation Office — Taxation Statistics (~2.27 million individuals with a residential investment-property interest; ownership distribution)	Tier 1 — regulatory	2021–22; 2020–21
4	Reserve Bank of Australia — Bulletin: Insights From New Data on Australian Housing Investors (~70% own one property; multiple-property investors own ~half of investment housing)	Tier 1 — institutional	2026
5	Australian Taxation Office — main residence exemption / capital gains tax	Tier 1 — regulatory	2026
6	Services Australia — Age Pension assets test (principal home an exempt asset)	Tier 1 — regulatory	2026
7	Christopher Hall, Arrow Equities — proprietary observations from 500+ life insurance policy reviews	CH practitioner	2026

Educational Disclaimer: This content is for educational purposes only and does not constitute financial advice. Past performance is no guarantee of future results.

The information, opinions and other materials appearing on the Web Site are of a general nature only and shall not be construed as advice. Arrow Equities, AFSL 526688, ABN 87 645 284 680. This general information is educational only and not financial advice, recommendation, forecast or solicitation. Rose Bay Equities accepts no responsibility for the accuracy or completeness of the information, opinions or other materials provided on or accessible through the Web Site. The Web Site has not been prepared with reference to your individual financial or personal circumstances. You should not rely on any advice in this Web Site without first seeking appropriate professional, financial and legal advice. Further, where Rose Bay Equities makes third party material available or accessible through the Web Site you acknowledge that Rose Bay Equities is a distributor and not a publisher of that content and that its editorial control is limited to the selection of those materials to make available. We accept no liability for any loss or damages arising from use.