Below is the Executive Summary of a new paper by Bob Birrell and Ernest Healy from The Australian Population Research Institute. Like MB, it argues that the Andrews Government’s Suburban Rail Loop Project (SRL) is unnecessary, wasteful and will choke the state in debt.
The SRL also highlights one of the many costs of mass immigration. The project has been created to ameliorate the impact of Melbourne nearly doubling in size to a projected 9 million people – an expansion few Melburnians actually want.
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The SRL is intended to provide a fixed rail, underground orbital link through Melbourne’s middle suburbs from Cheltenham to Werribee. Its main function is to provide public transport options for the residents living near an SRL station.
The SRL is based on two population assumptions.
One is that Melbourne’s population will grow at past rates to reach around 9 million by the year 2050 (from 5.1 million currently). The other is that a significant share of this increased population will locate in the middle suburbs served by the SRL.
This report argues that the SRL is not needed. Why?
First, the population and public transport demand assumptions are overstated.
Second, the SRL is not fit for purpose. There are cheaper options to provide public transport to the middle suburban activity centres.
Third, the cost of the SRL will be enormous, at least $34.5 billion for the East section from Cheltenham to Box Hill. The State is already heavily indebted. The Victorian Government is concurrently pursuing a renewable energy transformation and the modernization of the State’s economy. These should have a much higher funding priority than the SRL.
The SRL is not needed
As indicated, the SRL is being justified by the forecast that Melbourne will reach the 9 million level by 2050.
Melbourne’s population has, until recently, grown faster than other Australian capital cities.
This is because it has retained its comparative advantage in housing affordability relative to other potential locations in Australia.
No longer.
By the fourth quarter of 2021, Melbourne was ranked the fifth most expensive city in the Anglo world as measured by the median housing price to median household income metric. Only Hong Kong, Sydney, Vancouver and San Jose were more expensive.
Melbourne reached a ratio of 12.1 on this metric, up from 9.7 in 2015 and 8.3 in 2013. By 2021, except for Sydney, Melbourne was far more expensive than any other Australian capital city, including Brisbane at 7.4 and Perth at 7.1 and way above that of most regional centres in Victoria and elsewhere in Australia.
Our analysis of the factors shaping the supply and demand for housing, indicates that this situation is unlikely to change.
On the supply side, buyers seeking a separate house in established suburbia in Melbourne face a median price of around $1.1 million. Their choice is limited because around half the stock is held by households aged 50 plus, few of whom show any inclination to move.
Our projection for the growth of demand for separate housing over the decade 2012-2022 (Table 2) indicates that the share of the established separate housing stock occupied by households aged 50+ will increase. This is because the baby boomer cohort is replacing a much smaller cohort born before 1945.
Also on the supply side, fringe housing used to provide a safety valve. But, not any more. The State Government’s planning strategy for Melbourne, which prioritises higher-density residential development in established areas and which limits fringe expansion, is biting. Buyers on the fringe must locate some 50 kilometres from the CBD. By the first quarter of 2022, once there, they faced a median price for a block of $370,000. This bought a tiny block, averaging just 357 square metres.
On the demand side, there is no relief in sight. The size of the millennial cohort of households has grown rapidly, mostly because of expansion in the number of migrant households locating in Melbourne during the past decade who are now in this age group (aged 25-39) – see Table 2. Millennial households are the most interested in purchasing a separate house because they are entering the peak years of family building aspiration.
This is a recipe for sustained housing scarcity and sustained high prices. Consolidation will not relieve the situation. The price of units and town houses is also accelerating because the site costs for higher-density housing are so high.
The migrant impact is being ignored
Governments and business interests have expressed concern about the consequences for younger families of this housing affordability crisis. These interests are at the same time the strongest advocates for a rapid expansion of the migrant intake. There is minimal acknowledgement that such a revival will make the housing crisis in Melbourne (and Sydney) worse.
Housing prices, locational decisions and the SRL
The implications of the housing affordability crisis for the assumptions used to justify the SRL are profound. Given the importance of home ownership in Australia for financial security, Melbourne is likely to lose more of its residents than in the past as they vote with their feet to find affordable locations elsewhere. Migrants too, are less likely to be attracted to Melbourne.
It is highly unlikely that Melbourne will reach 9 million people by 2050 upon which the SRL planning is based. A figure of near 7 million is more plausible.
There are also doubts about the scale of the presumed higher-density settlement in the suburbs to be served by the SRL. Separate housing, and thus development sites in these suburbs already cost $1 million plus. These suburbs are unlikely to provide the affordable housing sought by the younger households who are likely to work or visit the SRL activity centres.
The SRL is not fit for purpose
Even if the State Government’s forecast of 9 million by 2050 were to eventuate, is fixed rail the best option to provide public transport options to the proposed Activity Centres? Bus links, in particular, would be a far cheaper option for delivering a dispersed suburban population to these centres.
This case is spelled out in Infrastructure Victoria’s proposed infrastructure priorities. It states that:
Buses are the closest option to home. Buses do not require large, expensive, immovable infrastructure investments and can operate on most roads. The relatively low capital cost of buses means they can respond quickly to changes in population, technology, policy and behaviour.
Furthermore, why build an expensive, immovable fixed rail system when there are growing doubts about use of the system. These derive from the increased post-Covid preference for working at home.
A debt bomb
The Victorian State Government cannot even cover the costs of providing services for its rapidly growing population from current tax and other revenues. For 2022-23, the Budget forecast is that there will be a net borrowing requirement of $14.3 billion.
The vastly larger borrowing requirement for infrastructure is additional.
Net debt from these borrowings was $60 billion in 2019-20. It doubled to reach $119.4 billion in 2021-22. According to the 2022-23 Budget Papers, net debt will reach $162.9 billion in 2023-24 and $182.3 billion in 2024-25. This debt is far larger, relative to the State’s economic size than is the case for the other large States (NSW, Queensland and WA). The debt required to finance the SRL will be additional (very little private sector involvement is expected).
The Victorian Government must make choices if its renewable energy and economic modernization aspirations are to be achieved. The SRL is a third order priority.
The renewable transition
We show that the renewable energy transition will be far more costly than is assumed in the State Government’s current assessments. The State’s confidence is based on the rise in the share of renewables in electricity production in Victoria from 10 per cent in 2014 to 26.6 per cent in 2020. This achievement was based on householder installation of solar panels. The State’s investment contribution was minimal.
This relatively cheap public cost phase is ending. Huge investment will be needed to cover the withdrawal from base load coal power, which cannot compete in price with renewable sources. Firming power will be needed to cover times when renewable energy is not available. It will be a major task and the public costs will be high, especially if the Victorian State Government pursues its stated objective of de-gassing the State’s energy system.
If this firming power is to come from renewables it will require investment in the transmission system to bring renewables from dispersed sources to the metropolitan market. It will also require massive investment in electric power storage. The State Government is assuming that the private sector will take up the challenge. We argue that this is unlikely, except at a high cost.
Economic modernization
Victorian governments have long promised that with the demise of Victoria’s manufacturing industries (following the removal of tariff protection in the 1980s and 1990s) they would create the conditions for the emergence of new knowledge intensive and internationally competitive manufacturing industries.
This expectation has not been met, as our data on Victoria’s international trade position illustrates in spades. Figure 2 shows the value of Victorian imports and exports of elaborately transformed manufactures (ETMs) for selected years over the period 1990 to 2021. Exports have virtually flatlined at a low level (under $10 billion) since about 2000. By contrast, over the same period, the value of ETMs imported to Victoria has skyrocketed from just over $10 billion to over $60 billion.
The Victorian Government is asserting that the renewable transition will open a promising source of new industries for the State. This is an alluring prospect. However, it won’t happen without a targeted industry policy in which the State provides concerted direction and finance.
For this to occur the Victorian Government will need to make choices.
Conclusion
Victoria is a people servicing economy, driven by population expansion in Melbourne. The problem is that the costs of providing for these extra people are growing faster than State revenues.
Meanwhile, the capital costs of providing for the health, education and particularly the transport infrastructure needed for the growing population have escalated. These costs too, are being covered by debt.
Victoria is mendicant state.
It does not possess the industry base (like the commodity rich states of Queensland and WA) to provide the revenues needed to cover Victoria’s operational and infrastructure costs without massively increasing the State’s debt.
As a result, the Victorian Government has had to continually browbeat the Commonwealth for more funds and resort to ever more desperate measures to sell off State assets.
A breathtaking example of the latter was the State Government’s sale of an 80 per cent share of its VicRoads vehicle registration and licensing operations to a private consortium for $7.9 billion.
The sale was well publicised, but not its implications. It was justified as facilitating the modernization of the registration and licensing functions. Nevertheless, the Government acknowledged that the funds will go to a Future Fund aimed at ‘reducing the debt burden on future generations’ Sounds fine, but what was not acknowledged was the scale of the annual revenues that will be lost. According to the 2022-23 Budget Papers, revenue from the vehicle registration operations alone in 2022-23, were expected to yield $2 billion.
There are opportunities to break this cycle. One is the renewable energy transition and the other a targeted industry policy focusing on knowledge intensive industries, including those stemming from the renewable transition. However, these opportunities are unlikely to be achieved while the State pursues its capital widening Big Build priority.
A rescue of sorts is imminent. Housing costs in Melbourne are now so expensive that people are voting with their feet – away from – not to Melbourne, as in the past.
The likely slowdown in Melbourne’s population growth will diminish the State Government’s cost and infrastructure burdens. The SRL, in particular, will not be needed. This will allow the State to focus on the far more important tasks of the renewable energy and knowledge intensive industry transformations.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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