Why are inner city house prices so high?

Australian cities are uniquely monocentric, with a highly dense core of both residential dwellings and commercial activities, and far-flung low-density suburbs.  For the investor, the pattern of growth of the city is important for two reasons.

  1. It explains the strong relationship between yields and distance from the CBD for all property types, and
  2. it demonstrates the actual behaviour that leads to higher volatility in values in fringe areas.

An urban economics course at any university will begin by explaining the logic of urban agglomeration.  They will start with a spatial model of a single road with two users competing for passing trade.  Assuming a uniform distribution of traffic in all forms along the road, most students intuitively believe that the optimal position for the two users, to maximise exposure and accessibility to passing traffic, is at each end of the road.

Unfortunately, this intuition is wrong.  Because if they did both locate at either end, each user, say a retailer, could capture more of the market by moving towards the centre.  If, for example, one retailer stays at one end and the other shifts to the middle, the retailer in the middle of the street is most accessible to 75% of the street traffic.  Thus, the optimal competitive outcome that maximises exposure to passing trade is for each to locate side-by-side in the centre of the road.  This is one reason why certain types of businesses cluster together, for example food courts, tailors in Bangkok, and carpet sellers in Moroccan cities.

Once students grasp the logic, the model is expanded to add additional roads to create a network.  The optimal location then shifts to intersections of the network that offer maximum exposure to passing traffic, and maximum accessibility, from two or more roads.  In real cities, the network typically grows to reinforce this location as the most accessible, since any new development will need access to existing commercial activities, thus market outcome of a mono-centric city is born.  Almost every city in the world has an intersection of streets in the network commonly referred to as the cities absolute centre.

Urban areas grow outwards due developments in transport that allows the same accessibility over a larger distance.  A century ago most suburbs were walking distance to the inner city, which is also where ports and heavy industry was located.  Trams development allowed people to escape the filth of the city, and for a time it was the wealthy living further from the city, having both space and cleanliness, but maintain accessibility to the central commercial hub. The past 25years has seen gentrification of these inner areas and a return to residential densification.

The images below show just how much Australian cities have developed in line with the theoretical expectations.  The first shows the employment density of each 1km concentric ring from the Melbourne city centre:

Following a similar pattern, the below map of Sydney with the number of jobs within a 1.5km radius of the centre of each marked zone:

Below is a map of Melbourne residential density:

Finally, the below graph shows the increasing dominance of the inner city as a share of total city populations in our capitals since 1990, with recent data confirming this trend has continued:

In 2009-10, the inner-city LGAs of Sydney (C) and Melbourne (C) had population increases among the largest in Australia…

The 2009-10 growth rates in the inner capital city LGAs of Perth (C) (5.1%), Melbourne (C) (3.6%), Sydney (C) (2.5%) and Adelaide (C) (2.2%) were lower than their average annual growth rates over the five years to June 2010.

Why is this relevant?  Well, to point out the obvious, it is relevant because non-institutional property investment disproportionally takes place on the city fringes.  This occurs across all property types.   I believe, however, that this group of investors currently grossly underestimate the locational risk, and hence city fringe property values are likely to be extremely volatile, more so than if such investment decisions were based on cold reflection of real risks.

We know that greater accessibility leads to higher property values:

… for a given point, the shorter the trip to all potential destinations, the higher should be the value of land. A geometrically central location will provide trips of a shorter length to all other location in the city.

And the city centre typically provides this.  Which is why, when consolidation of space occurs during economic slumps, across all property classes, any fall in prices will make inner city areas more attractive.  The actual behaviour that causes the relative stability of the inner city comprises a number of factors.

  1. The relatively more financially robust tenants (in all property classes),
  2. a more diverse market for tenants,
  3. the lengthy leases possible with larger more established tenants (for commercial property),
  4. the latent demand for inner city locations when prices fall, and
  5. the ability for other property owners in the market to avoid forced selling.

This behaviour results in lower vacancy rates and more stable prices, which is widely recognised by the industry.  The below table is a typical example from Brisbane’s commercial and residential markets:

The reverse is also true during boom times, when a tight inner city market means that outer areas capture the ‘spillover’ of demand, leading to an amplification of property market volatility in fringe areas. A very diverse polycentric city on the other hand with multiple districts of intense commercial activity will have a flatter profile of volatility across the city.   There are many examples, especially in Europe and former Soviet states, were such multiple centres exist, often in the form of new and old city centres, with new centres constructed due to planning controls of old parts of the city.  Australian planners are definitely looking to emulate multi-nodal networks of activities within the urban footprints of our capitals.

The natural tendency for centralisation, plus planning intentions for urban nodes, means that the prospects for price stability relative to yields in Australia cities appear quite favourable in inner suburbs, say from 3-6km from the CBD. Without being specific, locations in this radius with scope for densification (unlike many established ‘blue chip’ suburbs) could lead to gains on local values (relatively), in addition to their locational value relative to the CBD.  Given that residential demand trends are shifting away from the suburban detached dwelling, towards well located attached dwellings, the ingredients are ripe for out-perfromance in these areas, particularly property with potential to value-add or redevelop.

These tangible on-the-ground realities of Australia’s capital city property markets should be properly understood by all market participants, especially, the new private investor in fringe suburbs looking for a long term store of value.

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Comments

  1. You are correct. The successful retailers are located at mid points on arterial roads. You could drill down a little further and find that the most successful small retailers are located on the left hand side of the road on the outbound journey, not the inbound journey. It doesn’t matter as much for larger shopping centres, but it still applies to some degree. Drivers don’t like to navigate traffic obstacles, or to cross oncoming traffic lanes.

    • Cities have been becoming less monocentric for decades, ever since cars were available.

      The famous land economist William Wheaton was responsible for devising monocentric mathematical “models” of cities in the 1970’s. But in 2002, in his paper “Commuting, Ricardian Rent and House Price Appreciation in Cities with Dispersed Employment and Mixed Land Use”, which was intended to better reflect real life, he came up with a much LOWER potential ratio of “central” to fringe land rent than in his earlier model; in fact, he states that the ratio will trend towards “1” as long as dispersion continues.

      The extremely dispersed cities of the USA like Houston and Atlanta certainly illustrate this principle – land nearer the centre is often only 3 times more expensive than at the fringe. A factor of 10 is common. In a utopian pure monocentric model, the factor is more like 100.

      The irony for urban planning is that in a dispersed city, it is easy for anyone to relocate closer to work or anything else – the price of the land is not a barrier. But urban growth boundaries tend to inflate all the urban land by a factor of ten or a multiple of ten, leading to serious distortions in location efficiency by households and businesses.

      • Land economists from Colin Clark (deceased) to Alex Anas (top contemporary land economist) have long said that dispersion of employment and homes is a natural response to the higher land prices and greater congestion nearer the centre.

        Furthermore, it is far more efficient to have smaller agglomerations of multiple types, than a single large one. In a single agglomeration, the congestion externality will be maximised but the agglomeration efficiency will suffer from “diminishing returns”.

        No wonder Alex Anas had the chutzpah to title a paper a year ago, “Discovering the Efficiency of Urban Sprawl”. He is a modern day Galileo confronting the High Church of Growth Containment with inconvenient evidence. And the real life evidence tends to confirm Anas’ theories rather than the theories of the growth containment advocates.

        But Australia’s own Prof. Patrick Troy deserves a hearty vindication – he gets a lot of this stuff right in his 1996 book, “The Perils of Urban Consolidation”.

  2. In many places they’re not really very high compared to the burbs, except for the ‘exclusive’ suburbs. Most of the difference is just a difference in travel costs and perhaps a small amount for lifestyle. I’ve lived in the city for 5 years and every time I think the cost is crazy and consider moving I realise that it’s only about 100, maybe 200 (if you are way out in the sticks) cheaper which would be practically the extra travel cost. And I like getting home at 5.20 not after 6.

    • I did the sums when I was in Adelaide.
      I worked out that for $75 more a week in rent, I could live in the CBD. This seemed expensive at first, but premium fuel was hitting $1.7 a litre at the time. I was easily spending $70 a week in fuel, and around $70 a week in parking.

      The choice was obvious.

      • Yes, agree with you both. The title is perhaps a little misleading, but the crux of the argument is that outer suburb prices have been bid up more than is justified given the relative risk to their value.

        • This is because households costs and debt have been increased, and their range of options for “location” has been NARROWED by urban planning that forces the price of land up.

          The people buying at the fringe are often buying “the least unaffordable option”. Without price inflation, people have much better options to live closer to the CBD or to any work or amenities. Urban land price curves slope up from the fringe to the centre; this is old news. But the prices for a given location tend to derive from the cheapest location, plus a premium. The cheapest location is usually the fringe.

          This is why Houston fringe homes are $120,000 and inner city condos are $150,000; but Sydney fringe homes are $450,000 and inner city condos are $1,000,000. In Houston, the options involve a choice between spending perhaps 30% of your income on “housing plus transport costs” by living at the fringe, and perhaps 40% of your income by living closer to the CBD. But in Sydney, living at the fringe costs you 70% of your income and living near the CBD costs you 150% of your income. (And the smart growth people have the chutzpah to say smart growth “increases choice”!)

          Of course the fringe dwellers in inflated markets are the first to go bust when a crash comes – this is because they are overwhelmingly the most recent entrants to an inflated market and are overstretched financially, not because of their location per se.

          People living in mature suburbs are more likely to have entered the market when prices were fair, and are likely to be carrying low debt.

      • Miss P, I think that is true for renting, but not necessarily so for buying. It was something I noticed recently when I had to move – there was a much smaller spread for rents than for prices depending on proximity to the centre.

  3. Melbourne in particular makes the case for better access to public transport the closer you are to the city centre.
    I live 3km from the CBD, I have 2 trams and a train line within a couple of hundred meters. It’s also the sweet spot for the $10 cab fare – including a small tip!

    I contend that the major reason Melbourne as a city works vs Sydney is the public transport. On a Friday night, it is quite possible to find a street car park within the CBD – something which is often diffuicult in Adelaide, and from stories, nigh on impossible in Sydney.

    Tram services, while usually relatively slow, have at least some demonstrable planning logic with most lines crossing over major train stations. A lot of people along these lines don’t even own cars. I’d love to know the car ownership heatmap of Melbourne and/or the fuel sales per capita compared to Sydney.

    They’re roughly the same size population wise.

    I agree absolutely on the centre being more attractive, though I still expect some of the apartment complex builders to have financial difficulties. They’re building expensive kennels. 150k for a haf sized shipping container isn’t my idea of “luxury inner city living”. It’s as if the builders definition of luxury is having a dishwasher. The 90’s called, they want their dishwasher back.

    It disappoints me that multicentred zoning wasn’t planned for decades ago.

    I suggest that an ideal design for a city consists of concentric rings. 1km for ‘CBD’, 5km for desnse residential, light industrial and slices of dense industrial and 5km for residential.

    Outside of that, there is a 10-20km gap of nature, farming, and arterial roads to the next city. Train lines would radiate from each city centre to the next making a 6 pointed star. I think it is important to keep real farming close to the population. Not only should it present farmers with a more readily available workforce, but it keeps them as part of our lives. They may work on the farm, but they could easily live in the suburbs. It should also greatly improve the food supply chain and allow each city centre to better manage its own transport networks to enable inter-city commuting.

    • Myne, it is also the concentration of and access to jobs that is critical. And as you and other posters have pointed out here, there are cost saving to be made when you live really close to the CBD, particularly in Melbourne because of our excellent public transport (despite the fact that many people refuse to use it!). I’ve visited Sydney many times and been really frustrated with the lack of public transport options around the inner-city – there are few ways of moving around efficiently without resorting to taxis or your car. I compare this to Melbourne where tram travel puts you within easy reach of almost anywhere in under an hour.

      • But it has been proved in every academic study that actually analyses this, that “housing plus transport costs” are LOWER the further away you get from a CBD. The costs of transport are less significant than the higher cost of housing closer to the CBD.

        Of course people who put up with very little space CAN trade off sufficient space to make it cheaper to live near the CBD. But that is not an option for many people, and not preferred even if it is an option.

        IF a city has VERY LOW land prices, like Detroit right now, the costs of transport are more significant than the costs of location. This is one of the free market mechanisms that helps an urban economy recover from a crash.

        The “Costs of Sprawl 2000” Report actually said that a median house price of $170,000 was a significant “tipping point” (at that time). In a city with a median house price below $170,000 it was more possible to SAVE “housing plus transport costs” by moving closer to the CBD, than in a city with a median house price above $170,000.

        The irony in this, is that when planners drive the price of urban land up with growth boundaries, they make it MORE LIKELY that people will locate FURTHER AWAY from the CBD to save money.

        Anthony Downs, one of the authors of the “Costs of Sprawl 2000” Report, has written elsewhere about this. So has Alain Bertaud. Neither Downs or Bertaud were aware of the others analyses until very recently, and were delighted to discover them.

        • Yes. Back in 2000, when house prices had barely blipped up from the mean, the population of Australia was 3 million lower, and Melbourne was 600,000 lower.

          There’s also the time is money factor. Imagine commuting from beyond Frankston every day!

          • +1

            The biggest consideration is time

            2 hours plus out of your day against say 45 mins HAS to be incorporated into the traditional rent v buy cost benefit analysis.

            Two approaches
            1. Factor the travel time into your working day and then consider the hourly rate

            2. Work out the total number of hours say yearly that this excess travel time removes from your otherwise free time and justify that the ‘prospective’ capital growth is worth this time (once again perhaps an hourly rate) – also consider what else you could be doing with this time.

            As an outer burber myself – I start the clock as soon as I leave the house. If the results become unsatisfactory I have the impetus for changes.

        • Phil, Science101, nothing can be proved, merely supported, it’s also especially unlikely with an academic study.

          And as prices rise, the value of living in the inner area depends on the differential in prices not the absolute value anyway. Only if the inner area increases more in absolute value is it no longer worthwhile. Looking at Brisbane (as I know it better) for equivalent neighbourhoods the cost difference is not that great. $800K plus for a nice house in Spring Hill or about the same in Eatons Hill. In anycase, the difference in transport only needs to cover the interest on the higher cost as the remainder is then retained equity (transport money is truly dead money, and dead time).

          Most of the people who buy a $380K starter home probably don’t have a clue what the real cost is to them and banks don’t help them in figuring it out either.

          • I was talking about the differential in value making it worthwhile to buy further away from the CBD because the differential is always higher than the extra transport costs.

            The “median” price just happens to be the “fulcrum” around which the differentials are distributed. If your median price is $500,000, the DIFFERENTIALS for “location” are going to be around twice as big as if the median was $250,000.

            But the cost of TRANSPORT is roughly uniform throughout the world; the cost of transport does not go up and down in correlation to the price differentials for location of property. Therefore, for a given spread of urban land prices, there must be a median price about which the differentials are distributed, that if it is BELOW a certain point, it is cheaper to “travel”; and ABOVE that point, it is cheaper to “relocate”.

            Yes, rising costs of travel will cause the differentials to rise, but in most cases, the differentials were ALREADY GREATER than the cost of travel.

            This is probably because the “rationing” of locations occurs “by income”, and the premiums paid for an efficient location relate more to the incomes of those bidding for it, rather than the crude travel cost savings. Higher income people value their time more, too.

            But there are quite a few cities in the USA where urban land values are so low, that travel costs ARE higher than the differentials for property locations – but Australia’s urban planners would recoil in horror from the policy framework that enables land costs to be this low.

          • You say:

            “….Most of the people who buy a $380K starter home probably don’t have a clue what the real cost is to them and banks don’t help them in figuring it out either….”

            The people buying at the fringe are usually buying “the least unaffordable option”. Without urban land price inflation, people have much BETTER options to live closer to the CBD or to any work or amenities. Urban land price curves slope up from the fringe to the centre; this is old news. But the prices for a given location tend to derive from the cheapest location, plus a premium. The cheapest LAND is usually at the fringe.

            This is why Houston fringe homes are $120,000 and inner city condos are $150,000; but Sydney fringe homes are $450,000 and inner city condos are $1,000,000.

            In Houston, the options involve a choice between spending perhaps 30% of your income on “housing plus transport costs” by living at the fringe, and perhaps 40% of your income by living closer to the CBD. But in Sydney, living at the fringe costs you 70% of your income and living near the CBD costs you 150% of your income. (And the smart growth people have the chutzpah to say smart growth “increases choice”!)

            Of course the fringe dwellers in inflated markets are the first to go bust when a crash comes – this is because they are overwhelmingly the most recent entrants to an inflated market and are overstretched financially because of that, not because of their location per se. People living in mature suburbs are more likely to have entered the market when prices were fair, and are likely to be carrying low debt.

        • But Phil, the financial and personal cost of owning and running a car is really significant. Since I’ve moved to the inner city five years ago and stopped owning a car I’ve saved at least ten grand a year in petrol, depreciation, fines, insurance etc etc. Added to this, if you hate driving in congested traffic (as I do) then the much more expensive inner suburbs are really worth it despite the other factors you mention.

          • Exactly, I don’t think that people realise the cost that travel has. The RACQ releases a good paper each year with the annual cost of running a car which is between $6000 and $20000 depending on size.

            So if $6000 is the cost lost to transport then you could take the equivalent loss on a property cost (which is the cost of interest on a loan as the rest is equity).

            $6000 covers the interest on a $100000 loan, so if your location choice means you can get rid of one car you could spend $100000 more on a property.

            In most cities that makes a massive difference on where you could choose to locate.

            And I agree Sean, I don’t enjoy the travel so there’s a greater benefit there too.

            If on the otherhand you get utility from the commute, keep the car and drive, I’m not here trying to force people into the city (actually, stay away, I like it as it is) but I don’t think that people have any comprehension of the true cost not to mention the time.

          • But MissP, the difference in cost between a fringe home and a home near the CBD, in cities where the median price is something like $650,000, is NOTHING LIKE AS SMALL AS $100,000.

            Your figures only help to prove my point. Sacrificing your CAR, MIGHT get you a house 1 or 2 km closer to the CBD in the money you save on the house, BUT you STILL have public transport fares which eliminate a good portion of the “gain”.

            Especially if you are talking about sacrificing that $100,000 to move from 40 km away from the CBD, to 35 km away from the CBD. The 35 km trip will probably involve a mode transfer, and you will be lucky if there is not a long walk in it somewhere; AND the annual cost of public transport fares might easily be $3,000.

            This is before you even consider that most people own a car and only compare the marginal costs of RUNNING it, with the costs of public transport and/or moving closer to work. It is also before you consider the cost of running a 2nd hand 7 year old 1.3 liter hatchback which you bought when it was already mostly depreciated; rather than the RACQ’s aggregated figures that include the costs of brand new cars, V8’s, luxury cars, etc etc.

            The book “Still Stuck in Traffic” by Anthony Downs, discusses all this.

          • I don’t know Brisbane. Every feature of “property” has its own supply and demand curve. Age of home, size of home, size of section, proximity to good schools, quality of neighbourhood, proximity to commercial areas besides CBD.

            I stand by what I am saying – when controlling for other factors, the rule is that higher median property prices INCREASE the worthwhileness of living in a cheaper home and incurring higher travel expenses.

            From Anthony Downs; “Can Transit Tame Sprawl?” Jan 2002:

            “…..In “The Costs of Sprawl 2000″, a recent study conducted by Rutgers University, the Brookings Institution and several other organizations, part of the research examined how housing prices vary with distance from the regional downtown of each metropolitan area. Although only a few areas were analyzed, the study showed consistently that prices of similar homes tended to decline about 1.2 to 1.5 percent per additional mile from the regional downtown, except where proximity to the ocean had more influence on prices—as in Southern California. Meanwhile, longer-distance commutes added to fuel and travel-time costs by about the same amount per mile in every region. The study also found that per-mile housing-cost savings from added commuting distance were much larger in regions with absolutely very high housing costs than in those with absolutely low housing costs. Therefore, it was MORE LIKELY TO BE ECONOMICALLY WORTHWHILE FOR HOUSEHOLDS TO MOVE FURTHER OUT TO GAIN CHEAPER HOUSING in HIGH-HOUSING-COST REGIONS such as the San Francisco Bay and Boston areas, THAN IN LOW-HOUSING-COST areas…..” (My emphasis)

    • “….It disappoints me that multicentred zoning wasn’t planned for decades ago….”

      Australia has Prof. Patrick Troy, who had a book published in the 1990’s called “The Perils of Urban Consolidation”, in which he strongly advocates policies to SUPPORT decentralisation and NOT the CBD. He condemns policies aimed at supporting the CBD as the result of vested interests among property owners trying to maximise the “rents” available.

      “Downtown, Its Rise and Fall” by Robert Fogelson, is a scholarly discussion of numerous actual case studies of this phenomenon. He points out that “investment” in “radial transport networks” are “a popular tool for this purpose”, all the better if the transport networks costs are paid by out of revenue other than CBD “rents”.

      Colin Clark, in “Regional and Urban Location” (1982) says: “….In net effect, the subsidies on rail and subway suburban transport are subsidies to the owners of certain types of land – for which there is no social justification. …..”

      This is why commuter rail creates much greater incentive for lobbying and pork barrelling than roads do. Roads tend to spread their benefit widely, whereas radial transit networks focus them.

      • Interesting. I’ve heard that someone did a study and found that hexagons were the most efficient way to lay out cities – remarkably similar to what I came up with while, I shit you not, looking at 7 bottles of beer in a circle :p

      • Phil,

        While there may be arguements for decentralisation it would be a policy rather than the natural development. The densification of cities is something that occurred naturally, long before there was substantial planning.

        As someone who has worked both in the CBD and around 15kms out, there is a lot more going for the CBD. I have very little choice when working outside the CBD, little choice in transport, food etc and it is much harder to meet up with people, or find places to exercise.

        There are certainly businesses that cannot locate in the CBD due to the nature of their business, but as the vacancy rate is much lower on more expensive offices in the city and there are masses of half empty office parks located near motorways and public transport it seems to indicate that businesses see a value in being in the CBD. I can see why, when I have been outside the CBD any business interactions are substantially more difficult and very few businesses operate as an island.

        Lastly, there are much fewer subsidies on public transport around the CBD as they have much higher cost recovery, the subsidies go to the services demanded by residents of far flung communities who nevertheless choose to commute to the CBD.

        I can see that roads provide a different type of equitable access, but it merely shifts those excluded from people who live further out to those who cannot or do not want to drive.

        • It is my painful duty to point out that almost everything you have said there is the opposite of the truth.

          Decentralisation is what is natural, not “centralisation”. Centralisation has occurred “naturally” on the scale of “rural to urban”, but in every city in the world where the “rural to urban” drift is mature, the drift of the urban population and businesses has been towards the fringe. This is the case in every city in the USA and Europe and Australia since 1920 to 1950, and is even the case in developing countries today.

          You need to read some authoritative text books by urban economist/historians, not propaganda from advocates.

          On the subject of who is subsidising who, of course this varies from country and country and from city to city, but Australia’s situation has been comprehensively evaluated by Patrick Troy in “The Perils of Urban Consolidation”. Troy condemns the wealth transfer that has long been proceeding in favour of CBD property owners.

          My other posts on this thread say more about this.

          • Phil,

            I’m happy to read your opinion, but please try to put it forward in a way that is not dripping pretentious subtext.

            I have tried to put forward my contribution in a way that does not impose my position but puts forward the information I have as objectively as possible to allow readers to make up their mind.

          • My opinion??????

            Oh, really, I would like to be a nice gentleman blog debater and not offend anybody, but I state the FACTS, and that is an opinion?

            I am not the one imposing a position on society – it is the advocates of urban containment that are doing that. It is THEIR subtext that is saturated in pretentiousness, save the planet, raa raa raa. Their studies and their findings are fraudulent, as with the CAGW fraud that is close kin to the urban growth containment one.

          • MissP. Phil always backs up his arguments citing extensive research and real life examples.

            I find it amazing that you criticise him for “dripping pretentious subtext”. Why? Because he is smart and argues based on evidence and facts rather than unsubstantiated opinion?

            Play the ball not the man.

          • Happy to play the ball if it is not hurled with condescending language. As I said, no problem in listening to Phil’s argument, I just don’t need to be told how ‘painful’ it is to point out things we disagree on.

            If we disagree, why not start a response with “I disagree because…” And then provide the position.

          • My problem is that I am a huge fan of P.G. Wodehouse, and the language his characters use is forever slipping into my blog posts.

            Sorry to cause offense, old bean. Try and imagine me as Jeeves.

        • Miss P, you seem to be in favour of presenting an opinion of what ‘sounds good’ rather than what is proven empirically.

          Often repeated axioms dont make them facts

      • This is why commuter rail creates much greater incentive for lobbying and pork barrelling than roads do. Roads tend to spread their benefit widely, whereas radial transit networks focus them.
        .
        You are assuming road users will have an endless supply of cheap (*) oil.
        .
        (*) Cheap as in “subsidised” – lobbying by Big Oil has led to large defense spending and wars with a $3 trillion price tag, in order to protect and defend the “cheap” supply of oil.

        • Far cheaper to just buy it off Saddam Hussein than to invade his country.

          So why will there still BE a whole lot of CBD jobs for people to catch trains TO, once oil is so expensive no-one can afford to run a car any more?

          You MUST be a true believer in the “consuming”, debt-driven economy that “Flawse” was talking about below.

          • Far cheaper to just buy it off Saddam Hussein than to invade his country.
            .
            At least in the world I live in, that is NOT what happened!
            .
            Maybe Saddam Hussein is still alive in the Ayn Randian parallel “true believer” universe.
            .
            So why will there still BE a whole lot of CBD jobs for people to catch trains TO, once oil is so expensive no-one can afford to run a car any more?
            .
            I don’t have a crystal ball to see what will happen when the oil runs out. Maybe CBD will be re-purposed for residential use and people will travel outward to their jobs.

          • “So why will there still BE a whole lot of CBD jobs for people to catch trains TO, once oil is so expensive no-one can afford to run a car any more?”

            One of the reasons I made this decision on where to live.
            I’m a 25 minute walk to work.
            I bought a fun supercharged car when petrol hit $1.40 because I figured it might be the last time I could afford to have so much fun while I was still young enough to do so.

            Let’s just ignore the fines… 😉

            Anyhow, there will always be jobs in the centre of a city. It’s where the infrastructure all goes. Good or bad design doesn’t make a difference to the future. It’s what we’ve got. We have to live with it.
            We have to adapt to the possibility of oil becoming uneconomical.

            The one hope I have to reverse this trend is the National Broadband Network. Now, I don’t necessarily see everyone working from home, though the possibility is there, but I DO see large consolidated businesses reversing the trend that ironically, telecommunications helped cause. That is, they will have multiple branch offices in the middle suburbs and you will work at the one closest to you.

            Back in the day, it was impossible for say, a bank branch to centralise its accounting. Communications changed all that, and so branches lost staff because face time is preferable for better management. However, communications are now offering the very impressive ability to teleconference in very high resolutions with very high believability.

            The problem at the moment is not a matter of possibility, but a matter of accessibility. Most communications cannot offer this – certainly not outside the CBD.

            As the NBN rolls out though, businesses will be able to maintain and effectively manage multiple remote sites. It is really the only piece of the puzzle we’re waiting on to allow decentralisation to work.

          • The one hope I have to reverse this trend is the National Broadband Network.
            .
            What!! Don’t you know the NBN is a wasteful socialist government plot to enslave us all!!

          • UE, you mean more people will be able to telecommute compared to now? Surely you jest. We already have video conf, VPN, etc, and the thing stopping me from telecommuting is not bandwidth, it’s the requirement to talk and meet with people face to face. Same situation for employees in retail, manufacturing, etc.

          • “Far cheaper to just buy it off Saddam Hussein than to invade his country.
            .
            At least in the world I live in, that is NOT what happened!”

            No, but my point is, and you should have realised this, that if oil was what drove US foreign policy, they would have just continued to do business with Saddam. Whatever they do, they are criticised for it. They just buy the oil, they are criticised for propping up a corrupt dictator. They topple the corrupt dictator, they are accused of wanting his oil – when that was a stupidly expensive way to get it compared to propping the dictator up.

          • “….I don’t have a crystal ball to see what will happen when the oil runs out. Maybe CBD will be re-purposed for residential use and people will travel outward to their jobs…..”

            Why would it not be better if they already lived out near the suburban jobs, on lots big enough to grow their own food and do a whole lot of other efficient things that Patrick Troy discusses in his book, which I highly recommend to you.

        • Mav, I think you are also making the mistake of assuming that cars can only run on oil. Thanks to improvements in battery tech, there are already practical electric commuter cars on the market, and I’m quite certain they will become increasingly popular as they get cheaper and better. Transport fuels can also be readily synthesised from other hydrocarbons like natural gas. I think those who have latched onto the peak oil idea in the hope that it spells the end of the private car will be dissapointed.

          Having said that, I don’t have anything against public transport, I use it myself to get to work, and I think it’s the best option for heavily trafficked routes like going into the CBD. It’s quite liberating not having to deal with peak hour traffic, then trying to find a parking spot. I even spent 18 months without a car, and can see that is quite a viable option for quite a few people. It’s terrible for suburb to suburb trips, and you can feel a bit restricted as to where & when you can go places, which is why I ended up getting a car again. But I still don’t use it much.

          • We could meet ambitious emissions targets with EXISTING technology, let alone new technology.

            People are still buying new V8’s and SUV’s and big luxury cars. Most of the failure to reduce emissions immediately is the result of discretionary spending. Governments are trying to find ways of stopping this discretionary spending by well off people, without hurting low income earners in the process, and it is impossible to frame the laws and regulations in a way that the voters will accept.

            Of course the alarmists mostly love the idea of totalitarian solutions but they dare not say so; but no-one points out that the emperor has no clothes; the half-measures are a total waste of time anyway.

            It speaks volumes that the totalitarians preferred solutions are to try and force everybody to live in apartments and catch trains (which actually did not give the former USSR any economic advantage at all anyway), when simply mandating small and efficient cars would actually WORK HERE AND NOW.

            Changing urban form faster than the scale of natural obsolescence would cause more CO2 emissions that it would save over the next 100 years anyway – apartments are very CO2 intensive to build.

          • Mav, I think you are also making the mistake of assuming that cars can only run on oil.
            .
            No. I actively follow the trends in EV tech – GM Volt, Better Places, FCV Clarity etc etc.
            .
            You make the mistake of assuming that Big Oil will sit idly by and let any new tech drive them into obsolence.
            .
            Come to think of it, the libertarian souls in the US openly proclaim that they hope GM Volt will fail, because it is “gubmint” product created by that socialist Obama, never mind if the underlying technology is good or bad. Does Big Oil have a hand in encouraging this? Definately.

          • We could meet ambitious EXISTING emissions targets with EXISTING technology
            .
            Fixed it for you.
            .
            By EXISTING technology, I guess you mean the Internal Combustion Engine (that is run by oil)?
            .
            Yeah, Nothing like maintaining the status-quo and let the rent-seekers extract a lil bit more profit (actually, quite a lot) out of a century old technology.

          • I didn’t say that extending the life of the existing technology was the best solution, I was merely contrasting it with the utterly insane focus on urban growth constraint that is our status quo. Even with the existing less-than-ideal technology, we could meet ambitious emissions targets with mandates that were FAR LESS harmful to society and our economy, than urban growth constraint is.

            It is a pity that the electoral backlash that can be expected from banning V8’s and thirsty luxury cars is more scary to the politicians than setting up a fiscal child abuse scheme in urban property, with wealth transfers setting historical records and the entire economy being eviscerated in the process.

            And technology exists to provide far BETTER options than just downsizing our internal combustion engined vehicles – I am the first to agree with that. I think I have established the point that there are probably vested interests behind the adoption of urban growth restraint as the preferred policy approach to reduce CO2 emissions, regardless of how wrong and indeed evil an approach this is.

          • , I was merely contrasting it with the utterly insane focus on urban growth constraint that is our status quo.
            .
            I don’t know how that got anything to do with public transport versus roads.
            .
            In any case, I am not arguing for urban growth constraints. I am just saying Big Oil muddies the water a bit by commissioning these anti-rail and anti-densification “studies”, so that the status quo continues a bit longer and they can continue to rent-seek.

      • “Why, when there is so much idle land, should it be parceled out by Realtors to families, in strips 25′, 50′, or even 100′ wide? This imposition is a survival of feudal thinking, of the social economies practiced by and upon the serf. An Acre to the family should be the democratic minimum … What stands in the way?”

        “Even the small town is too large. It will gradually merge into general non-urban development. Ruralism as distinguished from urbanism is American, and truly democratic.”

        -Frank Lloyd Wright, 1931 A.D., “Modern Architecture, Being the Kahn Lectures,” Page 212 in: “Frank Lloyd Wright, Critical Writings in Architecture.”

      • “Broadacre” is great too.

        ABSOLUTELY Frank Lloyd Wright is “the man” that our architects and planners should be taking their cues from.

        • “BROADACRE” is FANTASTIC

          “the first and most important form of rent contributing to overgrowth of cities, resulting in poverty and unhappiness, is rent for land: land values created as improvements or by growth, held by some fortuitous fortune’s accidental claim to some lucky piece of realty, private but protected by law. Profits from this adventitious form of fortune create a series of white-collarites – satelites of various other unearned increments, like real-estate traffic in more or less lucky land areas…. (page 35 of “the living city” by FLW.

          and.

          “The poor are poor because of tripple rent: rent for land, rent for money, rent for ideas. (page 161 the living city” by FLW)

          and then,

          “But Henry George showed us – his people – clearly enough the simple basis of human poverty : the only organic solution of the land problem needed…..” (page 162 “the living city by FLW).

          Both regarded somewhat outdated these days but FLW understood the value of land (not to be confused with “land values) because he understood Henry George. Both are still GIANTS as far as Im concerned.

  4. david collyerMEMBER

    An almost fabulous primer on the benefits of central location.

    Almost? Rumpelstiltskin talks of ‘property’ prices. The real value, the permanent wealth, resides in the land component. Structures come and go, the land endureth forever. Increases in either population and incomes devolve onto the land, doubly so when both rise. Community investment – roads, libraries – boosts land values further.

    We could fund the majority of government from this bounty with Land Value Tax, if we were prepared to stare down the rentiers clutching at passive income and unearned increments of wealth.

    The land price boom we have just witnessed was a shockingly wasteful diversion of capital. We could have bought BHP, Rio, Vale and Glencore with a fraction of the $4 Trillion we poured into land speculation. Instead, the bust will erase equity and leave the heavy debt. Have a Happy Consolidation, everyone.

    • I take your point David. I prefer the term property because it describes a legal bundle of rights. Land is simple the ground. You can have property rights to air space (strata and volumetric title) which still captures social rents.

    • David Collyer, you are absolutely right.

      The most sickening irony of all, is that the planners cause this bubble by “restraining urban growth” to economise on infrastructure spending. MATE, HOW MUCH infrastructure COULD we have bought with the sunk debt now being held by everyone who bought their 1st home since about 2002?

      Patrick Troy discusses the “cost of infrastructure” pretext in “The Perils of Urban Consolidation” and finds it wanting even BEFORE considering the issue of inflated land prices.

    • “land endureth forever”

      Until the sea levels rise a bit. What on Earth are we going to do then!?

      • The projected sea level rises are on a time scale that fits nicely with the rate of obsolescence of infrastructure and buildings.

        A rapid, planned change in urban form, though, causes far more emissions of CO2 up front (and the destruction of already-embodied emissions in structures that still had a useful life) than it can possible save over the scale of the next century or so.

  5. Rumples what follows are comments and thoughts not assertions as your piece gives a bit to think about.

    The trends you outline are pushed to teh extreme by the economic structure. I find it rather classic that as the centrepiece you use the situation of retailers. In Australia’s case how correct you are to do so.
    This debt dependent service economy, is based on retail, expensive banking, expensive lawyers, expensive Govt. etc so our economy completely fits the model. The city centre tells itself how im,portant it is to the rest of us, how much cleverer they are than the rest of us, and how they then deserve to be paid so much more than the rest of us. The whole thing is one big wank. Sydney is a prime example of this phenomenon.
    So suppose we start off thinking…’well we better get some production happening first before we start consuming’ I’d suggest the best place for the factory is probably the end of the road…room to manoeuvre trucks, space for storage etc. Indeed if we get two factories one at each end of the road would indeed be best unless there was some strategic access to materials at either end.Residential may then expand from either end of the road and indeed it may then pay the retailers to establish near the ends of the road rather than in the middle.

    So my point is that this economy is poorly structured and as I’ve argued before this contributes both to the size and structure of our cities which means the cost of infrastructure is way more expensive than it would otherwise be. We build massive flyovers and Freeways just to transport people to city centres to do jobs that only result in the creation of more debt. Expensive rail networks are required and the water and sewerage engineering problems are beyond my imagination and thank heaven there are people around smarter than me in that regard.

    Further most of the jobs in inner cities are aimed at inhibiting production in the rest of the country.

    I note Mervyn King, of whom I’m not normally a fan put his finger on the problem of Western economies in the last few days when he said that the problem is not one of liquidity nor of solvency but of the structure of western economies. Of course he then goes on to implement policies that reinforce the current poor structure.

    So, if you travel this country, you find empty buildings and sheds that used to house engineering works, welding shops, butter factories, packing sheds, furniture factories based on local timber etc etc etc These people, or more importantly their children, have all left to work in the cities in jobs like the Govt, Retail,Law, Urban Planning????>?> etc etc The towns struggle for existence and retailing closes down as does the local mechanic shop and a whole host of other small service people.

    We are wrecking and selling off our nation for what exactly?

    My other comment re your article is in regard to the education system. I have recorded my heated stand-up debates with economic professors, lecturers, and tutors over these consumption / debt centric models. I hadn’t realised they had become the preferred model for even urban planning!!!! Great Scot!! ? Why, in a modern education system, is there no thinking outside the square? Something is dreadfully wrong!!!!!!!

    • Flawse, you are another truly enlightened person. I was thrilled to read that post.

      EXACTLY, inner city jobs are part of the “wealth CONSUMING” part of the economy. A healthy “wealth CREATING” part of the economy is ESSENTIAL to maintain the viability of the whole. “Wealth creating” means “RESOURCE USING” – INCLUDING LAND. “Wealth creating” employment requires “space per worker”, and “production lines”, and transport links, and lines of shelving with room to maneuver a forklift between then, and room outside to turn a truck round.
      Exactly, exactly, exactly.

      THESE GUYS have “got it” too – there is hope for Australia:

      http://www.thenewcityjournal.net/ruining_our_cities_to_save_them.htm

    • There is still a case that the manufacturing businesses would cluster. That was initially what drove people from the country to the city through industrialisation. They may not be as densely employed, but they do still tend to cluster at ports or near input resourses. To locate at opposite ends of the road means access to only half the population for employees.

      It’s why Pauls doesn’t move out of South Brisbane, to move would take them away from half their customers increasing their costs despite the value of their prime land.

      • Miss P

        We are talking about where the emphasis ought be in our economic thinking. At the moment the whole emphasis is on more consumption which in the very simple model is the two shops stuck in the middle of the one road. These shops produce nothing and, as Aus now does, import almost everything creating debt. Expansion of this model has brought us to the disastrous situation we are at.

        Sure with industrialisation we still got cities and we do still have retail and services however these are a response to production and not an end in themselves. In the Aus economy and ,in particular in the CBD environment they have become an end in themselves. The CBD is being run for itself and absorbing the resources of the nation in the process.
        As you said yourself, the density would be less. More importantly we would still have factories closer to the source of the raw products. We would still have a very much more diversified economy.

        Democratically we now have the situation where any decision to take the economy back to a more production base would necessarily involve resources being allocated from the large cities to other parts of the country.
        Any Party advocating such a course cannot achieve power because of the concentration of population now in the Capital cities.
        The ‘intelligetsia’ who almost all exist in the CBD would find every reason to oppose such a plan. Those of us who advocate such a course are just portrayed as stupid ‘country bumpkins’

        Look at this MB forum to see the reaction as soon as some measure is advocated that would impinge on the lifestyles of those present!!!!

        Frankly! What a mess!

      • Of course manufacturers of complementary types will cluster. This is one of the factors that has created MULTI-NODAL cities, out of once-monocentric ones, once motor vehicles were invented. Manufacturers do not need to be in or near the CBD, in fact they could not afford the rents.

        Land-intensive urban industries have developed along with the modern economy, in a way they never could have without roads and motor vehicles. And it has been pointed out by several analysts, that Silicon Valley could never have occurred anywhere that land was expensive or prescriptive planning was in effect.

        There is FAR TOO LITTLE understanding of how much of the modern developed economy that we take for granted, we owe to roads and motor vehicles. “The Greatest Invention” by Randal O’Toole is a genuine scholarly work and a real enlightening read. (The spiteful treatment of O’Toole by the anti-road advocates says nothing of any factual basis about O’Toole and everything about the depths of political machination to which these people sink for the sake of their cause).

  6. From a cost perspective, why are many of the large businesses located in the cities to start with?.
    For example, what is the cost benefit for, say an insurance company, or bank, to be located in the city, as opposed to being further out from the city or perhaps in a regional center.
    The only reason that I can think of is government infrastructure. Access via public transport may be one reason, although being located further out near a rail line would also provide public transport access. Telecommunication infrastructure may be a big factor, and quite possibly the key one historically.

    To me the argument seems to be that prices are highest where the government invests/has-invested in infrastructure.

    It will be interesting to see if the NBN changes any of this. I suspect it will.

    • Rents higher in the city, obviously. So, say average $600/sqm in the CBD, or $300/sqm in Parramatta.
      .
      Good rail links to Parramatta, central to all Sydney metro residential areas.
      .
      So a few businesses try sending their back office operations out there (banks, etc). Problem is, as Miss P touched on above, the amenity or perceived amenity in non-CBD locations is inadequate to retain staff! Now, in reality, people want to work where their freinds and peers are, the CBD.
      .
      So decentralisation could work and bring about cost savings from real estate cost reductions, but it needs to be supported through SCALE. Which means government support or coercion of some kind.

      • Actually, Patrick Troy in “The Perils of Urban Consolidation”, suggests that truly representative local government would be highly dispersed, not hunkered down in a CBD monolith.

        The coercion, subsidies, prescriptive regulation and so on, have for some time been biased in favour of the CBD and against dispersion, and trending more so thanks to “growth containment”.

        • If they were that dispersed they’d probably be completely disfunctional. Having worked in geographically dispersed offices there is a substantial loss due to difficulty interacting. It’s why businesses fly people for a 1 hour meeting around the world, interaction is a crucial part of effective business.

          • It depends what you mean by dysfunctional.

            I suspect that decentralising government would AVERT the worst excesses of Parkinson’s Law. I gather that the highly decentralised local government in Switzerland and France is quite efficient.

    • Insurance companies and banks HEAD OFFICES are logically best located in a CBD.

      But we cannot try and design a whole economy around CBD-supporting employment just so the trains are sustainable. The ECONOMY needs to be sustainable far more than the trains need to be.

      REAL GROWTH in the economy will come from businesses that USE LAND in large proportions, you can’t grow your economy with wealth-consuming Mcjobs in high rise buildings.

  7. “Australian cities are uniquely monocentric, with a highly dense core of both residential dwellings and commercial activities, and far-flung low-density suburbs.”

    Uniquely monocentric ompared to what? The US, UK, Ireland, Western Europe, the countries covered in the Demographia International Housing Affordability? I’m not disagreeing (maybe yet ;-)- just would like to know what the reference point is.

    • And just to reply to myself, yes, I understand the normal definition of uniquely but I’m going to assume that Australian cities are absolutely unique in the world (or even if by chance they are, that’s not what Rumplestatskin is referring to here).

    • Yes… same question here. Is any of this really *unique* to Oz cities?

      Or as Ross Garnaut (allegedly) once said (in relation to Japan’s post-war economic development), it’s unique but not uniquely unique…

  8. Here is something else that must be said about the whole “urban growth constraint” racket.
    Patrick Troy and Anthony Downs have both been pointing out for years, that sweeping changes in urban form cannot simply be mandated via plans which deliver semi monopoly gains to the owners of property favoured in the plans. The allegedly necessary changes actually require compulsory acquisition of land if they are to be realised at all.

    Curitiba (Brazil) did this, which is one reason why its grand plan for dense development around busways actually worked for a while.

    The fact that the advocates of urban growth constraint DON’T advocate this, means that either they are too economically illiterate to understand that their plans will never work while property rights and NIMBY rights exist in the areas they want to densify; OR they are part of a racket to deliver capital gains to property owning interests whose pockets they are in.

    I find it odd that so many “Greens” are actually lovers of totalitarianism, yet the compulsory acquisition of property that is ESSENTIAL if urban consolidation and transit-oriented development is to work at all, never seems to be on the PUBLIC agenda. Perhaps these people are smarter than I give them credit for, and they know their status quo mix of arbitrary plans, property rights, capital gains, wealth transfers, cyclical volatility, debt, and so on; are paving the way to totalitarianism.

  9. Please excuse the combined reply.
     
    AB and Zardoz,
     
    Unique in both the extreme nature of centralization, and the fact that it is common across all capitals.  Not that the principle is unique at all, since almost every city has this pattern to varying degrees.  Older cities find that prohibiting the demolition of buildings forces new development into fringe areas.  As I mentioned there are plenty of cities that have highly dense new areas that were planned during various eras.  Many cities in Europe, London, Paris, Vienna, for example, have new commercial centers on the ‘edge’ of their old cities that are in some cases more dense in terms of employment than older city centre.  Probably not the perfect use of the word.
     
    Philbest,
     
    I thought it was pretty clear that centralization is the market outcome, and that sprawl is an outcome driven by government assisted transport provision and redevelopment limitations.  I have no idea why you believe the opposite to be true, otherwise cities themselves would have never evolved.  I even cite papers you have previously linked to that explain this very point (eg Alain Bertrund).
     
    A polycentric city is still usually compact, but typically develops as a result of government prohibiting demolition and promoting the area’s growth.  Paris for example, has La Defense, London has Canary Wharf, and many other old cities have similar modern business hubs outside of the old CBD due to redevelopment restrictions.  These required a great deal of government involvement to attract businesses away from the old city centers.  Even back in the 1920s, when Le Corbusier developed his grand plans for Paris, there was not thought that people would want to leave the city, but that the city itself should be redeveloped.
     
    Nor again, do I fully understand why you differentiate between roads and rail development in terms of value adding to private land holders.  They both improve values of surrounding private property due increasing accessibility, as do other types of transport infrastructure investment.
     
    Bk,
     
    Thanks

    • Bertaud points out that urban growth containment forces up the price of land and this forces households and business to locate where the land is least unaffordable, nearer the fringe.

      You think centralisation is natural and free market; and decentralisation is driven by government subsidies. I believe the opposite. I explained above, why.

      http://www.macrobusiness.com.au/2011/11/why-are-inner-city-house-prices-so-high/#comment-107526

      Land economists from Colin Clark (deceased) to Alex Anas (top contemporary land economist) have long said that dispersion of employment and homes is a natural response to the higher land prices and greater congestion nearer the centre.

      Furthermore, it is far more efficient to have smaller agglomerations of multiple types, than a single large one. In a single agglomeration, the congestion externality will be maximised but the agglomeration efficiency will suffer from “diminishing returns”.

      No wonder Alex Anas had the chutzpah to title a paper a year ago, “Discovering the Efficiency of Urban Sprawl”. He is a modern day Galileo confronting the High Church of Growth Containment with inconvenient evidence. And the real life evidence tends to confirm Anas’ theories rather than the theories of the growth containment advocates.

      But Australia’s own Prof. Patrick Troy deserves a hearty vindication – he gets a lot of this stuff right in his 1996 book, “The Perils of Urban Consolidation”.

      • I also explained that centralisation of NATIONAL workforces going from “rural” to “urban” is a different phenomenon.

        The mass single-centre city predates the automobile and was necessary only because everything needed to be within walking distance. Everything since about 1920, has been towards dispersion of homes and businesses.

        The highways that you suppose to involve subsidy of sprawl, are in fact mostly radial and focused on the CBD. Had planners spent more money on inter-nodal transport infrastructure, decentralisation would have occurred even more rapidly. Monocentric thinking has in fact resulted in the CBD being subsidised, not the suburbs. It is trip DESTINATIONS that matter most for value capture.

        It is obvious that rails concentrate value capture and roads spread it, because the road has so many entry and exit points for car drivers. But the rail routes require either a walk from the station, or a mode transfer, which is a huge value-killer for locations further away from the route.

        You really need to read Anthony Downs and Patrick Troy.

        • Phil,

          While I appreciate the links and citations, I think the reason some commentators are becoming frustrated is that you simply cite someone’s book and move on, without actually explaining your argument. Both sides of an argument on this topic could find thousands of articles to support their view.

          Which means I would like to hear your explanation of the arguments in you own words. Examples would help.

          So far I have heard the following arguments from you –

          “Had planners spent more money on inter-nodal transport infrastructure, decentralisation would have occurred even more rapidly”

          Which suggests your multi-centred city is ultimately driven by government initiatives (as I suggested above). Historically from tram, train and road investment. But just because we can be a more diverse mono-centric city does not necessarily mean that alternative nodes of activity will spring up in new locations.

          You also cite low prices of homes in Houston as an argument for some kind of planning free-for-all. However, high prices are not evidence tight planning controls. Nor are low prices evidence the other way. As I have said quite a few times, prices are capitalised rents, and there are many factors that impact on the capitalisation rate that need to be considered if you are to compare prices in isolation. Remember, price is not cost.

          I wrote earlier in the week –

          “If two identical houses in two areas rented for $300 per week, but were subject to different land taxes, interest rates, and council rates, we could not compare prices to incomes in a meaningful way without considering these factors.

          One of the houses might carry a $150/wk cost obligation (in the form of takes, rates, etc). If net income for this home is capitalized at the prevailing 8% interest rate, it gives a capital value of $97,500. The other house might only be subject to $50 a week in costs in an area with prevailing interest rates of 5%, giving a capital value of $260,000.

          But each would cost the same amount per week to buy or rent. If incomes in both areas were $50,000 per year, one would show up as a price to income ratio of 2x, while the other would be 5.2x.”

          You also appear to disagree with my discussion early in this post about the rationale for agglomeration which is purely the result of free market incentives and nothing at all to do with planning, regulation, funding of transport infrastructure.

          Further, the price of land is not always closely related to the price of housing, especially at higher densities. It is a complete non-issue of land is $2000/sqm in the inner city, if the land is ‘shared’ amongst enough dwellings. You could easily imaging a situation where the plot ratio is 10x and the land component is a mere $200/sqm of dwelling. A 100sqm apartment would have a land component of cost of a mere $20,000.

          My post refers to evidence from multiple sources showing that Australian cities have become MORE monocentric over time. I have no idea how you can argue the opposite. This is clearly not because of planning, since almost every capital has massive tracts of developable fringe land for housing subdivision, and many tens of thousands of already approved fringe plots. e.g. http://www.macrobusiness.com.au/2011/09/the-housing-production-line/

          You wrote earlier today
          “sweeping changes in urban form cannot simply be mandated via plans which deliver semi monopoly gains to the owners of property favoured in the plans”

          This is exactly what happens in reality, although the changes don’t happen overnight (there is still a limit on the number of new dwellings in demand even if you allow an massive increase in new supply in an area). I have no idea how you can argue this is not the case.

          Again with rail vs road. Why is concentrated ‘value capture’ any worse than dispersed value capture of roads?

          Lastly, you often argue that 20 years supply is required to avoid opportunities to land bank. Exactly how does anyone know what 20 years supply would be in an area? And why not 18years? Or 12 years? Or less?

          • Indeed, “prices are capitalised rents” — unless, of course, the tax system so distorts the capitalisation that the financial system can’t support the resulting prices. Under that sort of tax system, prices rise until the financial system breaks, then collapse until the bad debts are somehow worked out, whereupon the cycle repeats; and at any stage of the cycle, the price of a property is determined by what you can borrow against it.

            For about two years I have been convinced that our tax system is indeed of that sort. Here’s my latest attempt at an explanation.

          • Cameron, I HAVE explained and explained and explained every single point you make an issue of, again and again and again on this site. You simply take no notice. I will clearly have to keep a database of our arguments and just put up a link back to them every time you do what you have just done again, above: that is, re-run the same old same old false arguments.

            This will take me a little time but I think I will take the trouble to do it, because I feel so strongly about these issues. I will revisit the thread with fresh comments, as it is getting too skinny here.

  10. Rumples

    I’m sure most of what you write is correct about ‘what is’! I’m reasonably equally certain that ‘what ought to be’ is something different.
    Repeating myself, if you start with a production model economy rather than a consumption model economy you get two different answers. People commenting here compare cities in the western world as if they demonstrate the correctness of the assertions. In fact the western world is pretty much entirely based on a consumption model. It occurs to me that areas within the western that have more production have more dispersed centres of activity.

    For me China represents an extreme example of this. In most places it can be difficult to tell where the city centre is or, truthfully for that matter, where the city is. There are obvious population differences here however it is a fact that development is definitely not as centric as say in Australia.

    Subsidies to city centres are not necessarily direct. Bank Headquarters, Ins Co’s mining co’s, Govts, etc etc etc etc all have Head Offices. Fees charges and taxes from all over the nation are used to support this structure. The subsidy is massive.

    • Production, just as much as consumption, benefits from agglomeration. After all, one businesses output is another’s input. Even consumers are labour inputs.

      If you are talking about cities which a strong manufacturing base as being more dispersed (but often still mono-centric) you would be correct, simply because these types of industries can be land intensive and require good access for heavy vehicles and to highways, rail and port links for heavy vehicles.

      Also, at a broader level, Australia is producing significantly more than it is consuming at the moment according to our trade balance (regardless of the financial repayments keeping that make up most of the CAD).

      • Yes, but WHAT is Australia producing at the moment, and what will be the EFFECT of policy settings on the long term TREND? It is lunacy to strangle the value added production part of your economy.

        Look what Britain has done to ITS economy since the 1947 Town and Country Planning Act. You claim to have read Alan W. Evans, you sure don’t want to actually learn anything from him.

    • Flawse is exactly right. The STRONGLY monocentric urban model depends on a high proportion of wealth consuming employment. If an economy is tending to accumulate debt, this is evidence that the balance between wealth consuming employment which supports strong CBD’s is out of proportion with the wealth creating employment that requires more land at lower cost. I suggest this is all part of the same global problem today.

      You cannot design ideal cities and then hope that employment by industry type, and flows of money in, out, and around the economy will automatically fall into nice sustainable patterns just to suit the planners ideal form of a city. This is the ultimate in tail-wags-dog thinking.

  11. Assuming when we say ‘Inner city house prices’ we include apartments as well as detached houses, I think planning restrictions play a role in the high prices. If as you say “A 100sqm apartment would have a land component of cost of a mere $20,000.”, not to mention that high rise apartments have high ongoing strata fees that can easily exceed $150pw, you would expect the sale prices to be much lower than the $600k plus these places recieve. In theory there is an almost unlimited supply of vertical space, but thanks to planning controls from local Councils that are so restrictive and complex, only a handful of companies like Meriton are able to operate in this area, and can seemingly charge what they like.

    • True.

      It is an eye opener to compare the price of equivalent “inner city” apartments in affordable cities in southern USA, with those in Australia – the difference is just as great if not greater, as the difference between new fringe home prices in each place.

      What I keep telling the planners, is that if you really WANT LARGE numbers of home buyers buying into inner area apartment developments, the inner area apartments will have to be $150,000 each for a decent family sized one – not in excess of half a million each (and often over a million). The effect of the status quo regulatory framework, is to create de facto gated communities for wealthy elites in the inner areas, and “sub-prime meltdown” areas on and near the fringe, which is the only place first home buyers can Str-e-e-e-tch to afford.

  12. http://www.macrobusiness.com.au/2011/09/the-housing-production-line/#comment-85777

    PhilBest says: September 20, 2011 at 10:46 am Cameron asks above:
    “…..You also appear to disagree that land prices are capitalised rent. So what are they?….”
    I did not disagree that land prices are capitalised rents, I said that it is quite possible that some part of that rent CAN be “monopoly” or “quasi monopoly”. The latter term is the best anyone has been able to come up with, given that we are not talking about a single owner of land in an entire city.
    Take 2 hypothetical cities of identical size, with identical populations, GDP’s, and income distributions. One city introduced urban growth boundaries recently and all its urban land is now double the price of the other. Where is the theory of land rent that can rationalise this without resort to a “quasi monopoly” element (or some other term if you can come up with a better one)?
    Historically, if there are not distortions in the supply of land, it is noticeable how land rents fall into surprisingly uniform patterns anywhere in the world. This is why median multiple house prices tend to reach an equilibrium at about 3.0 – whether a hovel in a third world city or a McMansion in the USA. When the relationship between incomes/GDP and land rents are massively distorted away from historical norms, economic theory simply has to admit some component to its structure, OTHER than the classical “all land rent is derived from incomes”.
    This is the crux of the failure of the whole economics profession regarding the crises afflicting almost every country in the world today. I am delighted to engage in discussion at a level where we can bring this point out.

  13. http://www.macrobusiness.com.au/2011/11/how-phoenix-housing-boomed-and-busted/#comment-104801

    PhilBest says: November 5, 2011 at 9:59 am Prices are NOT simply the capitalization of REAL ESTATE MARKET rents, they are the capitalization of ECONOMIC “rents”. ECONOMIC “rents” are NOT simply the same thing as actual rents paid to landlords. You have probably been confused ever since that economics lesson back at uni when they taught you about ECONOMIC “rents”. If I remember rightly, I think one of Alan W. Evans excellent books on land economics, points out that this confusion is common, with tragic consequences for the validity of a lot of economic analysis.
    The ECONOMIC “rent” of urban land in a bubble situation, is being extracted as much or more in “capital gains” as it is in tenants payments. In fact, ECONOMIC “rent” is commonly extracted in a bubble situation with NO TENANTS AT ALL. The corrupt officials in China who have already pocketed capital gains on developments that have been “flipped”, have extracted ECONOMIC “rent” already, EVEN IF there are NO TENANTS, and quite possibly whatever tenants will occuply those developments eventually, will pay rents to the “landlord” that won’t remotely relate to the capital gains that have already changed hands.
    “Planning gain” is simply another name for “(Quasi)MONOPOLY (ECONOMIC) RENT”. I find it ironic that left wingers today, even ones who claim economics expertise, are all cheerleaders for “planning”, when their idol Karl Marx was obsessed with “monopoly rent” in the urban land market. He was actually right ONLY as long as a landowner “class” CONTROLLED the conversion of rural land to urban.

  14. http://www.macrobusiness.com.au/2011/11/urban-sprawl-greenhouse-myths/#comment-106141

    PhilBest says: November 11, 2011 at 7:43 am And Cameron, I have made the point before, that the theory that “prices are capitalized rents” refers to “ECONOMIC RENTS” under theories of land economics, NOT “rents” charged by landlords in real estate markets!!!!!
    You are not the only person who has been confused ever since you were taught this theory in an economics class by a tutor who failed to emphasise this important distinction.
    “ECONOMIC RENT” includes capital gain and planning gain and monopoly gain, for example.
    In fact, the whole concept of “RENT-SEEKING” in an economy is a FAR broader concept than the relationship of landlords and tenants. A manufacturer or service provider granted a monopoly in their market, is an extractor of economic “rent”. This is the EXCESS of price they are able to charge in comparison with what they would have been able to charge if they had competition.
    ECONOMIC “rent” in the context of LAND markets, is simply the amount of gain that a property owner is able to extract OVER AND ABOVE what they would have been able to extract in a free market. “Planning gain” and inflation in urban land prices due to regulatory rationing, is the most classic, glaring, obvious example that students doing Econ 101 could be taught by way of illustration of the principle of “rent-seeking”.

  15. Cameron says:

    “If two identical houses in two areas rented for $300 per week, but were subject to different land taxes, interest rates, and council rates, we could not compare prices to incomes in a meaningful way without considering these factors.
    One of the houses might carry a $150/wk cost obligation (in the form of takes, rates, etc). If net income for this home is capitalized at the prevailing 8% interest rate, it gives a capital value of $97,500. The other house might only be subject to $50 a week in costs in an area with prevailing interest rates of 5%, giving a capital value of $260,000.
    But each would cost the same amount per week to buy or rent. If incomes in both areas were $50,000 per year, one would show up as a price to income ratio of 2x, while the other would be 5.2x.”

    Sure, you’re a guru at identifying and assessing inputs into property prices – every input EXCEPT the one that makes the BIGGEST difference of all.

    There is simply NO CORRELATION between low, stable urban land prices and ANY OTHER FACTOR except the elasticity of land supply. There are no markets for which a high property tax is responsible for low, stable urban land prices. ALL markets with high property taxes either have high elasticity of supply, OR they have a housing affordability and price bubble problem.

  16. Cameron said:

    “I would like to hear your explanation of the arguments in you own words. Examples would help.
    So far I have heard the following arguments from you –
    “Had planners spent more money on inter-nodal transport infrastructure, decentralisation would have occurred even more rapidly”
    Which suggests your multi-centred city is ultimately driven by government initiatives (as I suggested above). Historically from tram, train and road investment. But just because we can be a more diverse mono-centric city does not necessarily mean that alternative nodes of activity will spring up in new locations.”

    But I SAID in the first place: “….Land economists from Colin Clark (deceased) to Alex Anas (top contemporary land economist) have long said that dispersion of employment and homes is a natural response to the higher land prices and greater congestion nearer the centre.
    Furthermore, it is far more efficient to have smaller agglomerations of multiple types, than a single large one. In a single agglomeration, the congestion externality will be maximised but the agglomeration efficiency will suffer from “diminishing returns”…..”

    Why is that not a good enough explanation already? Dispersion of employment has already HAPPENED, it is not something that is “yet to happen” IF governments spend money on infrastructure that is more suited to multi-nodal form rather than monocentric.

    I also said:

    “….The highways that you suppose to involve subsidy of sprawl, are in fact mostly radial and focused on the CBD. Had planners spent more money on inter-nodal transport infrastructure, decentralisation would have occurred even more rapidly. Monocentric thinking has in fact resulted in the CBD being subsidised, not the suburbs. It is trip DESTINATIONS that matter most for value capture…..”

    Maybe I need to spell it out a bit more more. Radial transport infrastructure is “pro monocentric”. Inter-urban roads and ring-roads are “pro multi nodal”.
    Most planning and funding has always been for radial pattern transport infrastructure – very LITTLE planning has been done explicitly to encourage employment to DECENTRALISE.

    Mass public transit is a good fit with monocentricity and a poor fit with multi-nodal urban form. In monocentric form, everyone travels towards the centre at once. In WEAKLY monocentric, multi-nodal form, everyone travels in different directions and crosses paths with each other. Therefore, one of the important features of multi-nodal road networks, is interchanges to minimise cross-directional traffic flow conflict.

  17. Cameron said:

    “….Further, the price of land is not always closely related to the price of housing, especially at higher densities. It is a complete non-issue of land is $2000/sqm in the inner city, if the land is ‘shared’ amongst enough dwellings. You could easily imaging a situation where the plot ratio is 10x and the land component is a mere $200/sqm of dwelling. A 100sqm apartment would have a land component of cost of a mere $20,000…..”

    In every market in the world, but especially Britain since the 1947 Town and Country Planning Act, the evidence is that rationing urban land supply causes urban land prices to inflate far faster than people can trade off space against cost. The result is, less space, for a HIGHER price than what used to relate to more space.

    Raw land costs are SO MINIMAL in healthy, undistorted free markets, that it hardly MATTERS if a lot has another half acre or acre of land in it. In healthy, undistorted free markets, the cost of the BUILDING is the main cost, and the cost of “development” is the main cost in the “land”.

    In the distorted markets YOU are constantly DEFENDING, the RAW LAND is several TIMES the cost of “development”, and usually well over the cost of the house itself. The buyer might get $180,000 worth of house, $30,000 worth of development costs, and pays $200,000 for a TENTH OF AN ACRE OF SECTION and every extra tenth of an acre is another $200,000. In a healthy undistorted market, the buyer gets $180,000 worth of house, $30,000 worth of development costs, and the RAW LAND might be $3,000 for half an acre or $6,000 for 1 acre.

    Hence hardly anyone cares about any criteria for choosing how much land they want, other than their own time and effort required to take care of it – the cost of land is a NON ISSUE in healthy, undistorted markets.

    • And of course the way that the price of land multiplies from the fringe to the centre, as we agree on, means that the BEST located land in a healthy free market might still only be $30,000 for an acre of “raw land”, plus development costs, plus the structure.

      The BEST located land in Sydney? Forget about 95% of the population ever being able to afford to live there unless they want to live in a meat safe.

  18. I wrote somewhere above: “sweeping changes in urban form cannot simply be mandated via plans which deliver semi monopoly gains to the owners of property favoured in the plans”

    And Cameron says: “This is exactly what happens in reality, although the changes don’t happen overnight (there is still a limit on the number of new dwellings in demand even if you allow an massive increase in new supply in an area). I have no idea how you can argue this is not the case.”

    But do you not see that bestowing a particular right on a particular property, will result in a far more expensive development than simply having fewer regulations and allowing anyone to develop what there is market demand for, in COMPETITION with each other? I am amazed that you would be so sanguine about what is as good as a racket run between planners and property owners.

    AS I SAID ALREADY: (and I did not just cite authors and move on, I EXPLAINED)

    PhilBest says: November 17, 2011 at 11:49 am
    Here is something else that must be said about the whole “urban growth constraint” racket.
    Patrick Troy and Anthony Downs have both been pointing out for years, that sweeping changes in urban form cannot simply be mandated via plans which deliver semi monopoly gains to the owners of property favoured in the plans. The allegedly necessary changes actually require compulsory acquisition of land if they are to be realised at all.
    Curitiba (Brazil) did this, which is one reason why its grand plan for dense development around busways actually worked for a while.
    The fact that the advocates of urban growth constraint DON’T advocate this, means that either they are too economically illiterate to understand that their plans will never work while property rights and NIMBY rights exist in the areas they want to densify; OR they are part of a racket to deliver capital gains to property owning interests whose pockets they are in.
    I find it odd that so many “Greens” are actually lovers of totalitarianism, yet the compulsory acquisition of property that is ESSENTIAL if urban consolidation and transit-oriented development is to work at all, never seems to be on the PUBLIC agenda.

  19. Cameron says:

    “….Again with rail vs road. Why is concentrated ‘value capture’ any worse than dispersed value capture of roads?…”

    Do we live in a society that CARES about “inequality” and wealth transfers from a less well placed class to a more advantageously placed class, or NOT? I am really starting to wonder if I have encountered the Australian blogosphere’s biggest shill for the great wealth transfer racket in the property market, that is going on as a result of this planning nonsense.

    Furthermore, it hardly matters if people are forced by planners prescriptions, to locate nearer to rail routes, or do so voluntarily due to genuinely liking the idea: the gain in property values will “price out” all except the incumbents and the first few to relocate. The gain to the property owner is still a very nice one.

  20. I am really starting to wonder if I have encountered the Australian blogosphere’s biggest shill for the great wealth transfer racket in the property market, that is going on as a result of this planning nonsense.
    .
    PhilBest, Can you please switch off lights when you are done with your echo chamber rant.

    • Sure thing, Mav.

      I’ll do the same every time Cameron asks the same questions that I have already addressed before. Seeing I have made the arguments before (for him, too), it is easy to cut and paste them again.

  21. “….Lastly, you often argue that 20 years supply is required to avoid opportunities to land bank. Exactly how does anyone know what 20 years supply would be in an area? And why not 18years? Or 12 years? Or less?”

    PhilBest says: November 14, 2011 at 6:32 am “….I have not heard any theory that adequately explains this crucial requirement….”
    Yet you claim to have read Alan W. Evans’ books. Curious. You are obviously not much of a reader, or else your faculties automatically filter out any analysis that is inconvenient to your worldview.
    Evans points out (referencing a paper by Nelson, Knaap, Dawkins and Pendall) that when Portland introduced an urban growth boundary that had “20 years supply of land” inside it, just FOUR YEARS LATER, prices began to escalate. Evans therefore calculates and Shlomo Angel et al and Wendell Cox have also calculated, that commercial realities mean that “20 years supply” of land for urban growth is close to a bare minimum to prevent price escalations.
    The authors Nelson, Knaap, Dawkins and Pendall are pro-containment, and do their best to bury the reality in platitudes, but they are forced to admit that there is a correlation between “whether growth restraints make a difference at all to the amount of sprawl”, and “whether they force up land prices”. If they do not force up land prices, then they will not be containing growth either, in comparison to the absence of the regulations.
    I am sure I have explained this before, but here we go again. The reason why “16 years supply” of land for urban growth, will inflate in price.
    1) Approximately half the farmers within the boundary will not want to sell their land, period. That leaves us with 8 years supply, not 16.
    2) Suburban development projects typically take about 4 years, and developers typically like to have secured land for their “next development” well before they have finished their “current” one. The longer regulatory processes take, the stronger this commercial imperative becomes.
    3) Developers very quickly discover, when searching for their next piece of raw land for development, that there is a “shortage”. The bidding war begins against each other, and also higher and higher bids are placed in efforts to persuade the early farming holdouts to sell.
    4) The owners of the farmland within the regulatory boundary (or proxy for a boundary) “get wise”.
    WHY, WHY, WHY all the denial, Cameron? This is so SIMPLE.

  22. As Wendell Cox points out, most analyses around the world that allege that central city populations are rising as a proportion of the whole, are focusing on municipal boundaries rather than on urban areas that function as a whole.

    Suburbs outside the municipal boundary that are nevertheless part of the same continuous built up urban area, and that are adding population faster than the central city, therefore end up omitted from the calculations.

    http://www.demographia.com/db-evolveix.htm

    Hopefully Cox will actually add an Australian city to this series eventually.

  23. THESE guys quote figures for central city employment in Sydney and Melbourne, that do not show a particularly strong “monocentricity”:

    http://www.thenewcityjournal.net/ruining_our_cities_to_save_them.htm

    Wendell Cox said somewhere that the MOST monocentric cities in the world have a CBD share of employment around 33%. Wellington, NZ is one of them.

    Maybe we are talking at cross purposes. The original city you describe where everyone walked or rode horses, must have had a far higher “CBD share of employment” than THIS; what I am saying is that every city in the world has developed from THAT point, towards “lower monocentricity”. In fact, it has to have. Think about the effect on property values, of rural land being brought in to the urban economy, or NOT being brought in to the urban economy. Can you not see that the bringing of rural land into the urban economy with very little “planning gain”, is a vital factor in the rapid economic growth and development that most 1st world cities experienced at one time?

  24. My take? If you don’t vote for Clover Moore, or at least border her state electorate then you don’t actually live in “Sydney”. Greater Sydney? Sure. I would love to see a same scale map of Manhattan superimposed over the sprawl that people claim is Sydney.

    I lived in central Philly and Manhattan for 9 years before moving back. The Seppo’s get it. They wouldn’t pretend that Parramatta is in Sydney.