The Grattan Institute will launch a new book today entitled City Limits: Why Australia’s city’s are broken and how we can fix them.
The book contains a bunch of charts and analysis showing how Australia’s cities are not functioning properly. Included amongst these is the next chart showing how the bulk of jobs created over the five years to 2011 were created closer to the CBD, whilst most new houses were created further-out from the CBD:
The book also claims that inner city workers earn much more on average ($77,000 a year) than their suburban counterparts ($56,000).
Meanwhile, Aussies are spending around 20% longer commuting than they did a decade ago, whereas the proportion of people spending more than 10 hours a week in transit increased by around a half.
Meanwhile, access to public transport drops away sharply the further one moves out from the city:
The book recommends a major overhaul of Australia’s zoning and public transport planning to make Australia’s five biggest cities more livable and equitable:
“The growing divide between where people live and where they work is leading to congested roads, stretched household budgets, and growing pressure on social life”…
“[Cities are] the engines of our economy, producing nearly 80 per cent of national income, yet policymakers must address failures in housing, tax and transport to ensure our economic and social future”.
“The most important thing is to simplify the convoluted local government rules and processes involved in getting approval to build new homes in established areas”…
“Too many people are cut off from access to job opportunities by a dysfunctional housing market”…
The book also recommends winding back negative gearing tax concessions and curbing the 50% capital gains tax (CGT) discount for investment homes held for more than one year.
In analysing the book, there are a few important issues here that need to be highlighted.
First, the rise of the inner city has been driven largely by restrictions on urban land supply (both infill and fringe), combined with various tax distortions (e.g. negative gearing and capital gains tax concessions), that have facilitated the rapid growth of the FIRE industry (finance, insurance and real estate), which has underpinned the CBD’s dominance (see below charts).
These deliberate government policies have facilitated the mammoth rise in land/house values and household debt, which have lined the pockets of the FIRE sector. The massive land cost escalation has also hastened the demise of other industries, eliminating many of the jobs that used to exist in the suburbs (manufacturing the most prime example).
Compulsory superannuation has also driven resources to the funds management industry primarily operating out of Sydney and Melbourne.
So in effect, Australia’s housing policies and compulsory super system have transferred economic rents to the CBD from elsewhere – hardly an efficient or desirable outcome.
Grattan’s prescription that Australia should unwind tax distortion such as negative gearing and the CGT exemption is obviously sound, as is its call to liberalise planning (providing greater housing options), and to introduce congestion charges on Australia’s arterial roads (since it would discourage drivers who make relatively low value trips, speeding-up traffic flow).
Grattan also calls for better public transport to link outer-suburban areas to jobs, which on the face of it seems sensible. That said, a massive investment into rail-based public transport could actually be counter-productive and actually transfer further economic rents to the CBD and inner-city residents.
As noted by The Urbanist, Alan Davies, public transport has already received “a massive, growing financial subsidy” (see below), whereby “passengers don’t pay for any of the capital costs and on average only pay for around a third of operating costs. Yet in spite of the subsidy, public transport only accounts for around 10% of all motorised trips”.
Therefore, any significant expansion would overwhelmingly benefit CBD workers:
The single largest group of beneficiaries are those who work in the CBD. They’re the main reason transport authorities have to provide enormous capacity to meet demand in the peaks. They don’t however tend to use public transport in the off-peak when there’s plenty of spare capacity – they prefer to drive.
A key question is why CBD workers – or any traveller who doesn’t qualify as disadvantaged – warrants such a massive subsidy…
Other essential services like electricity, gas and water recover their full financial cost, both capital and operating, from customers. They target concessions to those who actually need them. Public transport however subsidises everyone who uses it irrespective of their means.
An obvious solution to reduce CBD rents is to implement a broad-based land values tax. Such an arrangement would ensure that part of the uplift to capital values from improved infrastructure provision (e.g. new roads, trains, etc) is captured by the state via taxation, rather than by nearby properties (e.g. inner suburban households, CBD businesses, etc). In turn, state governments would be encouraged to facilitate development and invest in new infrastructure, as opposed to their current preference of restricting development in a bid to save on infrastructure costs.
With an effective road charging scheme in effect, along with a broad-based land tax, there would also be minimal need to regulate to prevent sprawl. Home prices would be cheaper and people would be freer to make trade-offs between housing cost and location.
Reforms along these lines, along with freer land-use/planning, is the roadmap for better urban outcomes for households.
Indeed, the work of Alain Bertaud, senior researcher at New York University’s Stern Urbanization Project, highlights the perils of centralising power in the CBD.
Bertaud observes that higher densities generally fail to raise public transport use but often generate more traffic congestion: an outcome known as “the paradox of intensification”. That is, denser cities with shorter distances but inconvenient and slow-moving public transport can be less productive than wide open cities with free-flowing motorways:
As can be seen from the historical trend the monocentric model tends to break down when a city becomes larger … An original network of primary radial roads would reinforce a high degree of monocentricity as a city expands by making it easier to go to the CBD than to peripheral locations …
By contrast, a primary grid network would rapidly encourage the creation of sub centres with good overall accessibility as a city develops … The grids in these cities sometimes become irregular, but the availability of wide roads, perpendicular to the radial roads at the fringe of urbanization, stimulates the creation of sub-centres, and perhaps even of job dispersion, because wide roads allow for higher driving speeds and, therefore, for faster accessibility to areas farther away from the radial roads.
One final observation is the failure of commentators to acknowledge the elephant in the room: Australia’s massive immigration. That is, since the mid-2000s, Australia’s big cities have been overloaded with hundreds-of-thousands of migrants each year, which has necessarily put great strain on infrastructure, leading to congestion and traffic snarls, as well as reduced housing affordability.
Indeed, many of the problems associated with “congested roads, stretched household budgets, and growing pressure on social life” identified by Grattan has as much to do with Australia’s rampant population growth than it does with failures in other policy areas. Australia’s high immigration intake, therefore, also needs to be up for debate.