Melbourne Docklands

Productivity is ‘the efficiency with which an economy transforms inputs (e.g. labour and capital) into outputs (such as goods and services)'. Productivity growth is when the economy produces more goods and services from the same quantity of labour, capital, land, energy or other resources. The assumption is that improved productivity can generate higher real incomes and lead to long-term improvements in Australia's living standards.

Over recent decades Australia’s housing system has exhibited traits that have likely weakened urban productivity growth. The more stable tenure forms (home ownership and public rental) now house fewer households. The location of affordable housing for lower-income workers has drifted further from CBDs. The suburbanisation and concentration of disadvantage has reduced social mix. Each of these trends undermines the formation of human and social capital, in turn acting as a drag on urban productivity growth.

Key fact

Figure 1. Percentage change in lower income earners living in 10 kilometre bands from Sydney CBD, between 1986 and 2011

Figure 1 Lower income earners distance from Sydney CBD graph.

Source: What the latest evidence tells us, Professor Bill Randolph, 2015.

The economic and social wellbeing of the high-wage earners in CBD businesses are dependent on the low-wage jobs that service the businesses that deliver high wages such as workers in hospitality, transport and service industries. However, high housing costs are unbalancing this relationship.

The reduced pool of potential low-income workers can be seen in the fact that between 1986 and 2011, the percentage of people on lower income living within 10 kilometres of Sydney's job-rich CBD dropped by 82 per cent.

Policy development options

While the impact of housing investment on national income and employment in the short-term is well-measured and understood, there is less understanding on how housing impacts on long-term growth and productivity.

Housing policies that aid urban productivity growth will need to provide for factors such as greater housing stability, improved social mix and enable easier access to jobs.

Options for policies that provide for greater stability of household tenure include:

  • supporting entry to home ownership, such as through first home owner grants, stamp duty exemptions or shared equity schemes
  • growing the supply of secure tenure social housing such as through developing a large scale affordable housing industry or through increased investment by government in the supply of public housing
  • reforming the private rental market to enable and encourage longer term leases.

Options for policies that promote neighbourhood social mix include:

  • a geographically diverse supply of affordable housing stock
  • land use planning measures that allow for a diversity of house types and sizes; require a percentage of affordable housing in new developments; and preserve existing affordable housing stock.

Options for policies that connect housing with labour markets and enable ready-access to jobs include infrastructure development that is focused on delivering economic growth and therefore focused on jobs, transport and housing.

The following examples illustrate how urban productivity growth may be achieved or supported.
  • Stability: supporting home ownership

    1. Explanatory statement

    Householders who own or are buying their home are more likely to be living in more stable tenure, which helps develop human capital, particularly for their children. Households that rent in the private rental market have less tenure stability.

    The 2011 Census showed that 70 per cent (2,416,763 households) of Australian households with children owned or were buying their home and that 27% (923,225 households) of households with children were renting. The majority (72% or 685,000 households) of these tenant households with children were renting in the private rental market (i.e. through a real estate agent or other non-family owner).

    In 2007–08, 74 per cent of renter households moved at least once during the previous five years compared to 29 per cent of all other households (which includes home owner and buyers); and 33 per cent of all renter households moved three times or more during that five year period, compared to 7 per cent of all other households. The impact of frequent moves on children's learning ability is seen in research that reveals third grade students who had attended three or more schools since first grade had reading and math scores 41 per cent and 33 per cent, respectively, below average. Also, children who changed schools four or more times by eighth grade were at least four times more likely to drop out than those who remained in the same school.

    However, the policy levers that underpin the housing system are failing to sustain levels of home purchase, particularly for lower income households, including younger families. The ABS survey of Housing Occupancy and Costs 2013–14 shows only 8 per cent of lower income households (i.e. in the bottom 40% of income level) were home buyers, whereas 36 per cent of all Australian households were home buyers.

    2. A real world example

    A government policy, the first home owner grant (FHOG), was introduced to support entry into home ownership, and has therefore provided for greater tenure stability. Between 2000 and 2013, the Federal Government introduced a non-repayable FHOG (previously abolished in 1993). Currently, States and Territories administer their own schemes. For example, Victoria offers a FHOG of $10,000 for eligible buyers who purchase a new home valued at $750,000 or less.

    3. Scope of the practice

    In 2013–14, 61,177 first home owner grants were allocated across Australia, a substantial fall of 36 per cent from the previous year.

    Number of first home owner grants paid, by jurisdiction, 2011–12 to 2013–14
    Year NSW Vic Qld WA SA Tas ACT NT Australia
    2013–14 7,684 15,531 5,373 19,806 9,221 2,661 n/a 901 61,177
    2012–13 17,296 32,667 12,834 19,277 7,747 2,035 2,850 1,107 95,813
    2011–12 37,457 29,874 19,808 15,192 6,939 1,877 2,612 1,023 114,785
    4. Effectiveness/ impact

    Although more research is necessary the data suggests that the FHOG had little impact on overall levels of first home purchase, and that the average number of dwellings financed in the period 1993–2000, when there was no FHOG, was not much lower than in the period 2000–11 when assistance was provided. The findings were that FHOG related purchases were simply ones brought forward, as take up rates drop sharply after the peaks. For example with the implementation of the grant in mid-2000 numbers of first home purchasers increased markedly to over 14,000 in 2002 and then dropped to 6,000 in 2004. The commencement of the $14,000 First Home Owners Boost, which ran from October 2008 to September 2009, proceeded the next peak, when there were over 18,000 first home purchasers (in 2009) before numbers dropped back down to 6,000 in 2010.

    Housing Finance Australia.

    Economist Saul Eslake charts the increase in financial assistance to first home buyers, from around $0.2 Billion in 1964–65 to over $2.5 billion in 2009–10 (all in $2010). Eslake concludes that 'cash handouts for first home buyers have simply added to upward pressure on housing prices, enriching vendors (and making those who already own housing feel richer) whilst doing precisely nothing to assist young people (or anybody else) into home ownership.'

    5. Guide to evidence

    Evidence on the effectiveness of supporting home buyers is found in AHURI Final Report No. 154 The benefits and risks of home ownership for low-moderate income household, and AHURI Final Report No. 232 Generational change in home purchase opportunity in Australia.

  • Social mix: geographically diverse affordable housing

    1. Explanatory statement

    Failing to develop geographically diverse affordable housing can result in recruitment difficulties for business having staff in lower paid (but functionally necessary) occupations and the need to offer higher wages to offset high housing or expensive commuting costs.

    Currently Australian cities are losing their geographically diverse affordable housing; between 1986 and 2011 the number of people on low income living within 10 kilometres of Sydney's job-rich CBD dropped by 129,324 (or 82%).

    2. A real world example

    The city of New York in the USA has initiated a 10-year plan (from 2015 to 2024) to build and preserve 200,000 affordable housing units NYC so as to support approximately 500,000 New Yorkers living in households with a 'range of incomes, from the very lowest to those in the middle class.' In 2012, almost 55 percent of all households renting in New York paid more than 30 per cent of their income in rent, which was an increase of more than 11 per cent since 2000.

    The plan recognises that New York's economic and cultural strengths benefit from its 'unparalleled diversity. That diversity allows people from every imaginable background to live and work side by side, share aspects of their cultures, exchange ideas, then mix, match, and innovate to generate the art, literature, fashion, technology, and conceptual breakthroughs that are the envy of the world. And that diversity drives economic growth, as employers decide to locate in the City to take advantage of its incredible and multidimensional talent pool.'

    3. Scope of the practice

    Of the 200,000 households who will benefit from the New York Plan:

    • 11 per cent will be middle income households (i.e. earning 121–165% of AMI – Area Median Income)
    • 11 per cent will be moderate income (81 to 120% of AMI)
    • 58 per cent will be low income (50 to 80% of AMI)
    • 12 per cent will be very low income (below 50% of AMI)
    • 8 per cent will be extremely low income (below 50% of AMI).

    The New York Housing Plan proposes that 60 per cent of the affordable housing will be from preserving housing that is currently affordable but is vulnerable to future high rent increases or building demolition/refurbishment, and 40 per cent from the construction of new affordable housing.

    The Plan identifies that 'preservation is often a more cost-effective way of securing affordability and protecting tenants from the risks associated with poor maintenance and disinvestment. On average, the preservation of existing affordable housing requires fewer government and private resources, and can leverage past investments'.

    Maintaining the quality and affordability of housing that is currently affordable to low- and moderate-income New Yorkers is critical to meeting the City’s long-term housing needs. That housing stock includes publicly subsidised units, privately owned units, public housing operated by the New York City Housing Authority (NYCHA), rent-regulated units and housing that is rented at a market rate, but in a neighborhood where market rents are currently affordable to many families.

    New York's existing affordable housing is at risk due to the end of rent restrictions on previously subsidised affordable housing stock and the reality that many NYCHA units are falling into physical disrepair, while US Federal funding for NYCHA has nearly been cut in half over the last decade. Currently the NYCHA houses more than 400,000 tenants, with another 235,000 tenants receiving subsidised rental assistance in private rental.

    New York City is seeking to create a new tax incentive program to provide rental building owners a partial or full tax exemption in exchange for entering into a regulatory agreement that ensures affordability for the life of the exemption.

    The Plan estimate the total cost of the policy strategy, including all possible public and private sources, will be $41.4 billion (US $2015).

    4. Effectiveness/impact

    A previous affordable New York housing plan, the New Housing Marketplace Plan, operated from 2004–15 and resulted in 175,000 dwellings being made available for affordable housing at a cost of $8.5 billion, with 31 per cent for home buyers and 69 per cent for rental tenants. 64 per cent of the dwellings were existing dwellings that were preserved for affordable housing, and 36 per cent were newly constructed dwellings. Three quarters (76%) of the dwellings were targeted at low income households, 11 per cent were targeted at moderate income households and 10 per cent at middle income households.

    In Australia, to maintain similar geographically diverse affordable housing, state governments in Victoria and Western Australia have released plans to provide a larger range and supply of affordable housing that is close to the city centre and other major employment centres. Plan Melbourne 2014 and Perth’s Directions 2031 note that providing affordable housing close to activity centres will increase the catchment populations near these centres, which will in turn increase the consumption base needed for businesses to flourish. This would encourage business to expand and increase staff levels, creating more employment.

    It is too soon for any measurement of effectiveness of the Australian plans; however, neither features measures to preserve existing affordable housing.

    5. Guide to evidence

    Evidence on geographically diverse affordable housing is found in AHURI Final Report No. 251 Making connections: housing, productivity and economic development, and in AHURI Final Report No. 247 Addressing concentrations of disadvantage in urban Australia.

  • Labour markets: infrastructure development to access employment

    1. Explanatory statement

    There is a strong association between properties with good access to public transport and higher housing rents. In 2012, 43 per cent of low rent flats and 77 per cent of low rent houses in Melbourne had poor access to public transport and another 23 per cent of low rent flats and 14 per cent of low rent houses had marginal access to public transport. The difference in weekly rent between a two bedroom flat with poor public transport access ($270) and a flat with excellent access ($493) was almost double, at $223 per week.

    Having poor access to public transport translates readily to poor access to job opportunities. When transport to suitable jobs is too expensive or time consuming policies designed to move people off benefits and into employment will likely fail.

    In comparison, properties with good access to excellent public transport could access up to 60 per cent of jobs within a 60 minute public transport ride.

    Percentage of jobs accessible within 60 minutes by public transport, Melbourne

    Percentage of jobs accessible within 60 minutes by public transport, Melbourne

    There are also costs to the general economy (i.e. for individuals and businesses) when there is a mismatch between the location of jobs and affordable housing opportunities, and inadequate public transport. The Australian Bureau of Transport and Regional Economics estimated that there were productivity costs to individuals of around $7.4 billion in 2007 due to unnecessary time spent in traffic, while congestion represents a total economic drain of around $15 billion per year arising from increased vehicle running costs and air pollution.

    However developing infrastructure (e.g. road, rail and a high speed broadband internet system) can help tie householders in less well located housing areas to employment opportunities in regions further afield, thereby enhancing urban productivity.

    2. A real world example

    Two large transport infrastructure projects built in Melbourne demonstrate the impact of infrastructure development on urban productivity.

    • City Loop, an underground public transport railway system that ties together all areas of the CDB (in particular the northern areas) for commuters from across Melbourne, was completed in 1985. Since completion, City Loop has created $1.21 billion by boosting labour productivity in the city areas that were more accessible.
    • The Western Ring Road, completed in 1999, connects the Melbourne port area with developing residential suburbs and industrial zones to Melbourne's west and north. From completion to 2011, the Western Ring road has created $227.8 million due to improvements in labour productivity.
    3. Scope of the practice

    Both of these infrastructure projects were large-scale investments by the community. Melbourne's City Loop had cost $650 million ($1.785 billion in $2015) by the time the last station opened in 1984/85. The Western ring road, which runs for 28 kilometres, cost $631 million to build ($994 million in $2015)

    4. Effectiveness/impact

    Analysis by SGS Economics & Planning shows that by 2011 City Loop had generated a gross value added (GVA) uplift of more than $10.4 billion and has facilitated 74,000 jobs to locate to Greater Melbourne [GVA measures the value of goods and services, excluding costs of production, produced in a defined area, industry or sector of the economy].

    To 2011, the Western Ring Road had generated a GVA uplift of more than $2.5 billion, has facilitated 24,900 net new jobs and facilitated 17,400 households relocating to Greater Melbourne. The movement of freight is a primary function of the road and has spurred industrial growth along the road, resulting industry relocating to cheap industrial land in the west and north while maintaining good access to the port of Melbourne. This relocation freed up the inner city Docklands area for high-value residential and commercial redevelopment.

    The analysis of City Loop's impacts suggested that if all the jobs attributed to City Loop were new jobs (rather than a mix of new and redistributed jobs) then the benefits of the project across metropolitan Melbourne were $10.42 billion to 2011. This is made up of $1.21 billion from improvements in labour productivity due to the new and increased accessibility of city locations. The extra $9.21 billion came from having 74,000 extra jobs within Melbourne.

    Analysis of the Western Ring road project shows that most of the benefit of the project comes from the 24,900 new jobs created as a result. Nevertheless, 8 per cent of the benefits (or $227.8 million) to 2011 have come from improvements in labour productivity.

    Western Ring road impacts on Melbourne (2011)

    Benefit Financial Benefit  Share of Total Benefit Labour Productivity Improvements $227.8 million 8 per cent Additional Employment Benefit (i.e. 24,900 new jobs) $2.457 billion 92 per cent Total Benefit $2.685 billion 100 per cent.

    However, rather than just seeing the commuting to work/labour market mismatch as a transport problem it can be seen as a joint transport-housing issue. Policies that raise residential densities could serve the same policy goal of reducing housing costs by increasing the numbers of dwellings in 'well-located' areas, thereby also reducing transport time and costs.

    It is important that infrastructure investment (including support for housing development that improves accessibility of housing in relation to jobs and stimulates new supply and/or jobs) ensures that such public investments leverage increased quantities of lower and moderately priced housing rather than resulting in increased land and housing values for higher income households.

    In addition, measurements of the benefits or costs of infrastructure developments (and therefore of productivity growth) have to take into account factors that may be difficult to assess, such as impact on leisure, promotion of culture and sustaining the environment.

    5. Guide to evidence

    Evidence on the nature of infrastructure planning and housing in urban productivity is found in AHURI Final Report No. 251 Making connections: housing, productivity and economic development.

Background to the policy issue

The appointment of a Minister for Cities and the Built Environment in September 2015 signposted the importance of urban productivity to Australian Government policy. It was a recognition that Australia's cities 'are the engine room of commerce, infrastructure, innovation, the arts, science and development' and that 'it is vital that our cities are well planned, serviced with world class digital and physical infrastructure and environmentally sustainable so they continue to grow as economic assets into the future'.

In October 2015 the Minister acknowledged that the Government needs to address the accessibility of housing, and that housing should be 'closer to the jobs.' The Minister stated that 'there is a role for the Federal Government ... it is leveraging what role we already play in a disjointed fashion into a much more coordinated and collaborative approach, to get the outcomes that we need to make our cities those livable places, those accessible places and those productive places Australia needs them to be to continue growing'.

Evidence in action

Current research on this issue

The AHURI Inquiry, 'Inquiry into housing policies, labour force participation and economic growth', is supporting housing policy development by shedding light on the significance of causal mechanisms that link housing and economic growth (including employment participation, mobility, housing supply and wealth effects) in Australia.

Recent AHURI research has advanced that there is an interplay of housing characteristics (at least four) that relate to urban productivity growth, with each characteristic having one or more intermediaries through which they affect urban productivity. Urban productivity growth is measured at the city rather than household level, though the human and social capital of households are key inputs to the productivity equation.

Housing characteristic Intermediary Examples of productivity impacts
1/ Dwelling qualities Size/ comfort Human capital Impact on children's physical safety and development
Good light/ventilation reducing inhabitants' rates of sickness and use of medical services
 Impact on children's ability to study at home.
Space to create a home business
1/ Dwelling qualities Build quality Environmental efficiency
Reduce energy costs/carbon footprint/water use
2/ Dwelling location Transport Infrastructure Increased choice of employment and education opportunities, consumer products, health institutions and social activities.
Reduced time and cost in travelling to jobs, education institutions, health institutions, shopping, etc.
3/ Dwelling neighbourhood Social relations (Social capital formation and trust) Perception by others of the neighbourhood, such as employers discriminating against particular neighbourhoods.
Quality and variety of interaction in the local community (which can lead to business innovation etc.).
4/ Dwelling prices (purchase costs or rents) High costs/ reduced availability Unemployed people living in high housing cost areas are more likely to move than unemployed people in low cost areas.
Reduce spending on tradeable goods.
Deters agglomeration
4/ Dwelling prices (purchase costs or rents) Change in prices Encourage consumption (by home owners/buyers)

These housing characteristics can impact urban productivity either directly or indirectly.

An example of a direct impact can be seen in the 'location' characteristic of increasingly polarised cities, whereby low-moderate income households can't afford to live close to where the jobs are (particularly those jobs in the CBD), which leads to reduced employment opportunities for these households, and reduced profitability for CBD businesses who can't pay low-waged staff enough to make long commute times worth their while.

Examples of indirect impacts include the 'quality' characteristic of health whereby damp homes exacerbate respiratory diseases, which lead to increased sick leave payments, reduced business productivity and higher health costs for the community, or when crowded homes don't have quiet places for children to do homework or study, thereby reducing education outcomes.

Relevant AHURI research