29 March 2011
The Federal Government has indicated that its forthcoming “Sustainable Population Strategy” may declare that some regions have reached their carrying capacity. Sydney, Melbourne and South East Queensland have been named and concerns have also been raised about other cities.
We are concerned that the strategy may seek to freeze Australias capital cities at their current size.
People Power contains economic analysis and projections by respected property economists at MacroPlan. It considers the economic impact of a government policy decision to freeze the size of Australias largest cities.
Government does have the power to stop the growth of our major cities. It could – if it wanted to – prevent new home construction, restrict new infrastructure investment or stop immigrant settlement. But if the government uses those powers: our cities, our communities and our national economy will suffer enormously.
With our ageing population, if a citys population is to remain static its workforce would need to decline to offset the rising number of people reaching retirement age. The loss of workers would hit household income, which would feed in to lower property prices.
The report finds that a government policy capping a citys population at current levels will lead to:
||an 18.3 per cent decline for Sydneys residential property prices over ten years;|
||a 15.3 per cent decline for Melbourne;|
||a 14.7 per cent decline for Brisbane;|
||a 6.6 per cent decline for Adelaide; and|
||a 12.6 per cent decline for Perth.|
These projections should not be interpreted as suggesting that Australian real estate prices are likely to fall under current public policy settings. The projected decline in residential property prices could only occur if the government made a decision to cap a citys population at its existing level.
These projections are not relevant if existing policy settings remain and population growth in cities is able to continue, in-line with the needs of businesses and the choices of households. We do not foresee a US-style collapse in housing, unless the government deliberately uses population policy to engineer one.
Major cities are the most productive places for people to live and work. Larger urban areas tend to be more productive because they enable greater labour specialisation, better matching of skills and jobs, and a wider access to goods and services for both households and businesses. If government policy restricted Australians access to these places, more people would be forced to settle in areas where they are less productive, earn less and have more restricted choice of goods and services.
A systemic government policy seeking to redistribute population growth to less productive locations will have a greater economic impact than any changes to the headline rate of national population growth. Even if the government allows the annual rate of national population growth to continue at recent levels, the Australian community may end up bearing huge social and economic costs if that growth is not able to be accommodated in major cities.
The People Power report says that a population cap imposed across Australias five biggest cities could reduce national income by $5,000 per person within 10 years.
It is time to stop talking down our major cities. Our capital cities are powerhouses of national productivity; they are our best assets.
We hope the People Power report will inject a bit more reality into public debate about population growth in our cities.
Population growth breeds economic prosperity and social health. Our cities face challenges, but those challenges should be addressed with more investment, not with a closed door.
The findings of the People Power report:
The Federal Government has drawn a distinction between Australias overall rate of population growth and the population growth of particular regions whose carrying capacity may allegedly be reached. Its clear that the Federal Government is referring to Sydney, Melbourne and South East Queensland. It may also be referring to our fourth and fifth largest cities – Perth and Adelaide.
Capital cities have tended to expand more rapidly than regional areas in the recent past. The gains from scale economies means that the expansion of these key urban areas can generate and sustain productivity benefits over time. The development of cities provides benefits for consumers and producers, which underpin Australias strong growth in employment. The activity in these places is a sign of their economic success.
There is a risk that the Federal Governments sustainable population strategy will seek to constrain our most productive places – our major cities – in the name of encouraging population growth in less productive areas.
If government policy were to deprive households of the choice of living in a major capital city, and send them somewhere where they are less productive, they will lose out on income and lifestyle.
Larger urban areas tend to be more productive, because they enable greater specialisation in labour use, better matching of skills and jobs, and a wider array of consumption choices for workers and ancillary services for producers. As long as the productivity benefits generally outweigh higher costs for land, labour, housing, and other necessities, the expansion of major cities will continue.
The Federal Government could use its forthcoming sustainable population strategy to kill the golden goose by:
- preventing or constraining new dwelling construction in major cities;
- regulating the immigration intake to reduce immigration numbers overall and/or prevent immigrants from settling in the major cities; and
- by withholding funding for major urban infrastructure, such as roads and public transport, essential to supporting growth – thus encouraging existing residents to exit from major cities and discouraging internal migrants to those cities.
By extension, a policy move to cap the population of a city would have pervasive effects on economic conditions. The short term budget benefits in terms of lower infrastructure expenditure need to be weighed against the long term impacts on the economic conditions in the city.
On the surface, capping a citys population might be expected to create shortages of workers, and thereby place upward pressure on wages. However, the overall initial effect would be to reduce the citys workforce. Over time, a population cap for a capital city would mean that the rising number of retirees would need to be offset by a decrease in the workforce age population.
In fact, a citys workforce would need to decline, in order to offset the rising number of people reaching retirement age. The potential economic activity in a city would decrease, resulting in a substantial loss of productivity and a decrease in average household income. Declines in average household income would filter into residential property markets, resulting in decreases in prices.
People Power evaluates the scenario of a city population cap for the five largest capital cities.
Initial price declines would be moderate, but over the long-term they would lead to greater outward migration by retiree households seeking to limit capital losses. Decreases in the citys scale would lead to further decreases in productivity, and create a further round of decline in average income and residential property prices.
People Powers conclusions should not be interpreted as a suggestion that real estate prices are likely to fall generally. The projected decline in residential property prices could only occur if government made a decision to cap a citys population at its existing level. These projections are not relevant if existing policy settings remain and population growth in cities is able to continue.
With a static population induced by government policy, within five years, Sydney is projected to lose 28,000 workers a year, Melbourne 31,000 workers annually, Brisbane 20,000 workers a year, Adelaide 6,000 workers a year and Perth 15,000 workers annually.
Nominal incomes would fall over the medium-term at an annual rate of 1.3 per cent in Sydney, 1 per cent in Melbourne and Brisbane, 0.2 per cent in Adelaide and 0.8 per cent in Perth.
Over five years, with a government induced population cap, we would see a 6.5 per cent cumulative fall in Sydneys residential property prices, a 5 per cent fall in Melbourne, a 4.9 per cent fall in Brisbane, a 0.9 per cent fall in Adelaide and a 4 per cent fall in Perth.
The fall in property prices will induce a long term overall decline in a capital citys population, as retirees seek to cash-in the value of their home assets to avoid further losses. Sydney would lose 10,000 people a year, Melbourne 7,000 people a year, Brisbane 5,000 people a year, Adelaide 3,000 people a year and Perth would lose 7,000 people annually.
As a consequence, the annual fall in nominal incomes would accelerate: to 2.6 per cent in Sydney, 2.3 per cent in Melbourne, 2.1 per cent in Brisbane, 1.2 per cent in Adelaide and 1.9 per cent in Perth. In the second five year period after a population cap is introduced by the government, we would see a cumulative fall in residential real estate prices by 12.6 per cent in Sydney, 10.8 per cent in Melbourne, 10.3 per cent in Brisbane, 5.8 per cent in Adelaide and 9.0 per cent in Perth.
Taking together the two five-year projections (medium term and long term) the projection for residential property prices over ten years is an 18.3 per cent decline for Sydney, a 15.3 per cent decline for Melbourne, a 14.7 per cent decline for Brisbane, a 6.6 per cent decline for Adelaide and a 12.6 per cent decline for Perth.
If this scenario were to materialise we could expect significant social consequences for impacted cities. When urban productivity falls, the most active members of the labour force will naturally flee, but the durable nature of a citys housing stock ensures that their homes will then be occupied by those that are less connected to the labour market. Declines in population lead to abundant, cheap housing, which can end up acting as a magnet for households in social distress. Concentrations of poverty can deter growth independently from the initial trigger for a citys decline.
The evidence shows that declining cities tax and spend more than growing cities. Residents in a city experiencing a declining population can expect to see the urban environment around them degrade.
Government policy seeking to freeze a citys population may not be long-lived, as its consequences become apparent, but reversing the policy will prove much more difficult than its initial introduction.
Given the importance of city expansion as a basis for productivity growth, a systemic government policy seeking to redistribute population growth to less productive locations will have even more profound economic implications, than any changes to the headline rate of national population growth.
That is, even if the government concedes a high year-to-year rate of national population growth, the Australian community may end up bearing huge social and economic costs if that growth is not able to be accommodated in major cities.
A population cap across each of Australias largest five cities would lead to a substantial decrease in national average productivity growth, and thereby reduce the expected rate of increase in income per capita.
The net disposable income per capita in 2010 is $45,600 and without a population cap, it would be expected to rise to $53,500 by 2020 in 2009/10 terms. With a population cap across all five of Australias biggest cities and the limitation of national productivity growth to 0.6 per cent per annum, this figure might be reduced to $48,500. The nations per capita income would be $5,000 lower than it otherwise would have been.
People Power concludes that a sustainable population strategy must not directly or indirectly cap the population of any major Australian city.
In particular, it must not seek to use regulatory controls to constrain the construction of new homes. It should not try to impose long-term limits on our immigration program, nor preclude immigrants from settling in the major cities. It must not use transport infrastructure funding to impose defacto limits on population by directing transport spending to low growth areas (that will have smaller economic benefits than equivalent projects in high growth communities).
The report does have a positive vision for a sustainable population strategy. In its view, such a strategy should seek to drive planning reform across Australia and improve the ability of our cities to supply new housing in response to price increases, thus preventing excessive home price inflation.
The strategy should require every level of government to provide substantial funding to infrastructure that will ease the growing pains of our major cities. Infrastructure investments will need to include roads and public transport funding of a significant scale.
Should the federal government fear over-concentration, the sustainable population strategy should provide an opportunity for smaller cities neighbouring our largest cities to compete. This can be achieved by investing appropriately in inter-regional infrastructure linking nearby smaller cities to the biggest cities.
Additionally, the government could seek to give more cities the tools for good self-governance, including more regionally-based, better funded, local government authorities. Under this policy approach the smaller cities that are able to offer the necessary productivity boost will have the opportunity to succeed, without government intervention unnecessarily penalising the economic success of the largest cities.
The proposition that government policy should restrict urban growth to low levels, or even pursue a steady-state population, is dangerous. Such a policy risks the health of Australias most productive places. Policy-makers who adopt this approach will be playing Russian roulette with Australias economic prosperity and social health.
We have already had a taste of what can happen when government policy settings are deliberately used to constrain growth. Having declared that Sydney is full, former NSW Premier, Bob Carr, pursued policies that saw a sharp decline in Sydney dwelling construction in the 2000s, while housing construction in the balance of the nation remained steady.
While, for Australia generally, employment growth has been concentrated in the capital cities, jobs growth in Sydney slowed over the 2001 to 2010 period. The low rate of new housing supply has constrained the average level of population growth in Sydney, and effectively capped the potential jobs growth in that city.
As a result, household income per capita has increased more rapidly in Victoria and Queensland than in NSW. Over the 2001 to 2010 period, the rise in household income per capita in Queensland was $1,400 greater than in NSW and by $640 more in Victoria than in NSW. Capping Sydneys population growth has made NSW poorer than it needed to be.
Sydneys experiment with population growth control has not been a success. The states poor economic performance has deprived the NSW Government of revenue. Multiple transport projects have been cancelled because of lack of funds and an anticipated lack of patronage. Growth controls have led to an increased, rather than decreased, sense of despondency.
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