The State of Australian Cities: the view from Old and New South Wales

I’ve been reading again. This time it’s the latest edition of The State of Australian Cities, published last week. Published annually, it’s always been useful and full of insights and not just for those interested in Australia. All those involved in city planning, urban regeneration and economic development anywhere should have a look at it. It’s got transferable methodologies as well as a compelling evidence base. Don’t leave home without it.

Perhaps the most important aspect of it this year is its evidence that Australian cities, despite physically continuing to expand outwards – Perth for example will be 120k long in a generation from now – are actually in value terms beginning to contract. That is to say that as ‘ most of the industry sectors that are experiencing rapid growth are located in city centres and rely on increasing job densities to drive their productivity’, cities, measured in terms of the value of economic activity ‘may be beginning to shrink in on themselves, reversing the dispersing forces that have been dominant since e the end of World War II’.

This process is directly linked to two contradictory economic trends in Sydney in the last 15 years: the doubling of the proportion employed by the financial and professional services and the halving of employment in manufacturing. This sectoral shift is also a geographical shift as ‘knowledge jobs’ have clustered in Sydney’s CBD whereas manufacturing jobs were more dispersed with Western Sydney playing a leading role. The increasing weight of the CBD for desirable, high valued added knowledge jobs has led to a massive premium on homes nearest the CBD, transport congestion and a socially and economically unbalanced city.

Although NSW planning policy on paper favours the compact city formula and higher density housing, a combination of poor leadership /governance and nimbyism plus tax incentives for low density homes, has weakened that policy in reality. Yes the large majority of homes currently built are flats in existing areas but the total number of homes being built is half what is was at the turn of the century and maybe a third of what is needed. Hence the home-price explosion which has meant that it now takes 9 times average salary to buy a home in Sydney but also that whereas homes furthest from the CBD have risen by 200% in real terms in the last generation, homes closest to it have risen 500%. And a rising proportion of people in the latter homes are renting.

This is partly changing taste and demography. There is both less capacity to access homeownership today in districts close to the CBD and possibly less appetite. Young people are living with parents longer which also means they form their own families later. When they do leave the nest they no longer wish to drive 60 minutes to work and indeed fewer of them than ever own their own cars and drive. This is a significant new trend leading to greater housing demand on CBD-centric districts or districts close to public transport linked to the CBD.

This is where the tax incentives and nimbyism kick in to ensure that what extra demand there is to live in these CBD linked areas finds its way into higher home prices, insufficient supply of new homes and a radical shift towards renting. Negative gearing, capital gains tax benefits, stamp duty and development levies on new homes have resulted in existing homeowners being able to leverage their own homes to acquire a second and a third homes, squeezing out those wanting to become owners from doing so, compelling them to be renters. Australians believe themselves to be uniquely egalitarian and their country to be where the concept of the ‘fair go for all’ applies more than any other. In housing and the very shape of Australian cities, they are deluding themselves.

Essentially, home-ownership and particularly house-ownership, is no longer something even the reasonably well off can contemplate within 30 minutes travelling time of the CBD- without the bank of mum and dad. Inheritance has become the major route to home ownership in Sydney, which doesn’t sound very Australian to me.

The fact that affordable homes are only available in low density places far away from the CBD indicates that the price that is being paid for this unbalanced city is not just in house prices. The State of Australian Cities shows and work by SGS Consultants for COAG shows that those living in denser places near CBDs enjoy economic, community, education, health , social mobility and well-being benefits in advance of those who live in dispersed low density settlements . Indeed so strong is the evidence for the advantages of denser, more compact city development arising far from being closer to the economic action, that it raises the question as to why low density development on greenfield sites in the middle of nowhere is allowed let alone encouraged.

In Sydney the answer to this is a failure of leadership and governance, as well as imagination. Rejecting brownfield development under pressure from self-interested nimbyists and enabling greenfield development is the option of least resistance though as the Grattan Institute has shown there is less and less desire to live in such places and the dream of a quarter acre block is in reality so last century when compared with the desire to live near clusters of economic and social activity. The governance problem at the heart of Sydney’s housing malaise is the absence of big city government at a metropolitan scale to take the bold strategic decisions required to make the city work for all.

Ken Livingston and Boris Johnson in London and the Chicago experience over decades show you what metropolitan big city governance can do. In London, the eastward thrust of policy and public investment for 15 years has been the result with the Olympics being the icing on the cake of effective strategic governance for Greater London. Even Brisbane with its single council has been doing better than Sydney with its 43.

This is why the NSW government’s proposed reforms to local government and the planning system are so vital. Sydney simply cannot sort its problems or deliver on its economic potential without fewer but bigger more strategic councils or without getting rid of a Planning Act which has just become a Nimby’s Charter. Not only are such reforms vital for progress we also now know that the unreformed local government and planning systems have been holding Sydney – the engine of NSW and national prosperity – back .

More , they have been creating dispersed low density edge communities in Sydney which will be the sink estates or low value precincts of the future as the economy falls back towards the CBDs.  Such places are also where new migrants are clustering far from jobs, social support services and access to the kind of social mobility and cultural immersion in Australia which previous generations were afforded by living in denser inner Sydney locations.

I think the NSW government has begun to get this. The question is whether they have the political will to face down the nimby forces in their own culture. They are not alone in this. The Green Left is deeply hypocritical on the subject of growth – favouring high density development in the abstract or preferably Western Sydney but not where they themselves live, in the inner West for example. Both these forces will collaborate to prevent local government reorganisation (which they will caricature as ‘centralisation’ when nothing disempowers a community more than being trapped inside a council of 15,000 people with no capacity or resources to shape the market or be an equal partner with State government) and to roll-back the proposed planning reforms ( which they will depict as ‘pro-developer’ when they are merely pro growth). This nexus of self-interest and inertia in Sydney has to be broken for the city to fully realise its potential and to manage growth successfully. Will it? Can it?

I find it interesting that almost all of the above content can be easily applied to the apparently quite different London or other big UK city scenario. This fits another thing I’ve begun to notice and which the study of globalisation is showing us: global cities have a lot more in common with each-other than they do with the individual countries in which they find themselves. That’s for next time.

For this time, I conclude by suggesting you have a look at Enrico Moretti’s impressive book called ‘The New Geography of Jobs’. This is about not just the agglomeration effect of cities but about the way in which certain cities are racing ahead because they are becoming agglomerations of talent and concentrations of graduates. Really worth reading.

It also reinforces what I’ve said for some time about whether GDP or disposable income are the best measure of wealth of a society. Regular readers will recall that I have disagreed with the Welsh Government economists who are selling the line that Wales is better off than the GDP levels indicate because property being cheap makes disposable income higher.

Moretti understands this but points out crucially that by contrast with Wales where labour markets are weak and home–price inflation far lower than in the South of England, ‘Homeowners in strengthening labour markets gain twice, both because of higher wages  and because of higher property values . For them, the effect on well-being is larger than the increase in purchasing power because of the capital gains on their property’. He concludes: ‘a significant part of the wealth created by America’s dynamic innovation sector accrues not just through the labour markets but through the housing market’. What’s true of America is true for Old South Wales as much as New South Wales.