Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Saturday, 26 July 2014

Large cities - the engines of Australia's economy

Capital city hubs the engines of our economy

There has been a long running debate in Australia about the seachange phenomenon, but to my knowledge there has been not one iota of compelling evidence that Australians are moving away from the capital cities en masse.

In fact, all of the available evidence has proved precisely the opposite to be true: we have an overwhelming and increasing focus on the inner suburbs of our major capital cities.

The Reserve Bank of Australia recently carried out its own demographic research into the subject and found that jobs growth, population growth and house price growth are all becoming ever more inner capital city centric.

I didn't form my views by accident, by the way. Rather I've watch similar trends play out over the last couple of decades in a mature capital city (London) where the focus on prime central locations continues to grow and the disparity between dwelling prices in inner and outer/regional locations grows by the year.

With another 1 million people expected to descend upon London over the next decade, properties located to key transport hubs on the new Crossrail transport links are anticipated by analysts to boom by another 40% over the next four years.

Still, it's always good to consider a range of independent sources, and in that context I'll take a look today at the Grattan Institute's recent report "Mapping Australia's Economy" to see what we can learn from it.

Finding 1 - Economic activity is focused on a few capital cities

First and foremost, Grattan found that a stunning 80% of Australia's goods and services are generated on just 0.2% of our land mass leading to the inescapable conclusion that "cities are the engines of our prosperity".

This is partly because of the concentration of jobs in our Central Business Districts, but also because jobs based withing the inner cities are more productive than those located elsewhere. 

The largest cities and not regional centres are the key to Australia's future because economic output is becoming more knowledge and services based than it was in decades gone by when agriculture and mining dominated the economic landscape, a conclusion also reached by the most credible of economists, Ross Gittins. 

Even in the mining states such as Western Australia, a third of employees in that industry live in the state's capital city of Perth, partly due to fly-in fly-out, and partly because the accountants, engineers, executive and administrators are based in the city locations.

The red areas on the map produce 80% of Australia's economic activity on just 0.2% of the land mass.

Grattan found that capital cities are vital to economic activity, driving most of the economy is every state .

Even for regional centres, Grattan found that it is their proximity to the CBD which largely drives their fortunes and respective rates of growth. According to Grattan's research, regional centres located less than 150km from the CBD are growing at a considerably faster pace than those located further away.

Finding 2- Economic activity is most intense in Central Business Districts (CBDs)

Even within metropolitan areas, economic activity is heavily focused on central areas, and in each capital city intense activity is focused on only a small number of locations.

In Sydney, for example, half of all economic activity is generated from less than one percent of its land mass, with a similar pattern evident in other large cities.

Finding 3 - Inner city hubs have greater economic productivity

Economic productivity is much higher in the CBDs, partly because these areas are the major employment centres. But according to Grattan it's more than that, because concentrations of economic activity offer other big economic benefits:

"Businesses are more productive when they interact with larger numbers of customers, suppliers, competitors and partners, and when they can do so more frequently and closely. Employers are more productive when they have a larger pool of employees to draw on. 

Employees with a larger choice of potential employers are more likely to develop and make the best use of their skills. They also typically have better chances to be re-employed quickly if they lose their job."

In a virtuous circle, businesses also benefit from having a wider range of employees to choose from to fill vacancies, while specialist roles are also easier for them to fill. Being near to and interacting easily with other businesses helps corporations to flourish.

Finding 4 - Access to jobs is poor in outer suburban locations

Unfortunately, Grattan found that access to jobs in outer suburban locations is poor and "too many workers live too far from jobs. Few people are willing to commute further for jobs than they have to".

In all major capital cities, concluded Grattan, there is a major advantage in proximity to the city's centre. Research showed that in outer locations a very small percentage of jobs can be reached with 45 mins by car travel.

When Grattan considered public transport, their conclusions were diabolical for outer suburbs. In Sydney, for example, huge swathes of the city are almost totally cut off from access to jobs even if commuters are prepared to travel for a full hour by public transport.


Grattan's conclusions were direct and to the point: further urban sprawl would be damaging for economic prosperity, job opportunity and productivity.

"The vast majority of economic activity takes place in Australia’s large cities. And within these cities, economic activity is heavily concentrated. Australia's cities are the backbone of our economy, with CBDs and inner city areas critically important to the nation’s prosperity. 

Their predominance reflects the economy’s evolution from one based on primary industry, then manufacturing, then increasingly knowledge-intensive services."

Grattan advises that governments need to rezone or make land available for more people to live close to the cities while also improving transport links for those located in middle ring suburbs.

Former Reserve Bank of Australia senior analyst Callam Pickering, who's views and analysis are always worth a read, similarly concluded:

"Australia will continue to shift towards a more services-based economy, which suggests that activity will become increasingly concentrated within our major cities. As that happens, I expect that higher-density living will grow more popular as Australians put a premium on living where the action is."

Indeed so. The above conclusions help to explain why house prices have continued to and will continue to rise faster in inner ring city locations than outer ring suburbs in every capital city. This has demonstrably occurred both over the long term and over the past 7 years too as the ratio of inner ring to outer ring prices continues to widen in its disparity.

Graph 11: House Price Gradient