Productivity of our large cities at risk from unaffordable housing and congestion
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Productivity of our large cities at risk from unaffordable housing and congestion

Economic growth and productivity in Australia’s largest capital cities appear to be slowing

28 Jun 2021


Economic growth and productivity in Australia’s largest capital cities appear to be slowing, with unaffordable housing and traffic congestion the main causes, according to new AHURI research.

The report, ‘Relationships between metropolitan, satellite and regional city size, spatial context and economic productivity’ was undertaken by researchers from the University of Adelaide, Curtin University and the University of Glasgow (UK).

‘There is growing statistical evidence that rising ‘quit rates’ due to unaffordable housing and long commute times are already affecting cities such as Sydney, London, Toronto and Los Angeles’, says lead author of the research, Professor Chris Leishman, now of the University of South Australia.

It reveals that as workers face rising housing costs due to metropolitan growth, households may not be able to move into areas that offer them the potential to earn a higher wage.

At the same time, some businesses are struggling to get the skilled (and semi-skilled) staff they need at the wages they can afford to pay and still be competitive in a global market.

‘There is growing statistical evidence that rising ‘quit rates’ due to unaffordable housing and long commute times are already affecting cities such as Sydney, London, Toronto and Los Angeles’, says lead author of the research, Professor Chris Leishman, now of the University of South Australia.

‘In those cities, frustrated demand for appropriate housing is leading to increases in the rate of 25 to 40-year-old workers leaving the metropolitan areas for smaller cities and towns. This limits local productivity growth by influencing labour supply, which cause losses in efficiency.’

The report measures the benefits of agglomeration in international markets, with empirical results suggesting that a US city of 1 million people implies a wage rate 7.6 per cent higher than a city of 500,000 population. However, previous evidence examined for the report also found that for a majority of countries, relatively small cities of up to 3 million inhabitants are more conducive to economic growth than larger cities.

In a similar finding, the new AHURI research finds that the positive relationship between population and income is conditional on city population levels, suggesting that having greater levels of population increases wage rates for smaller cities rather than for much larger cities.

‘Government has an important part to play in our cities. Failure to manage the diseconomies of large cities, that is the high housing costs and long commute times, will reduce productivity and redistribute income and wealth away from the productive sector of the economy,’ says Professor Leishman.

The slowing of productivity increases in cities is not just an Australian problem. In the past most large cities around the world had productivity gains higher than the nations they are in, however since the GFC this has changed and they are now reverting to mean national rates of productivity growth.

In advanced countries such as the USA, the UK, Finland and Denmark the growth rates in metropolises have been lower than the national growth rates through the period 2010–2018.

‘Government has an important part to play in our cities. Failure to manage the diseconomies of large cities, that is the high housing costs and long commute times, will reduce productivity and redistribute income and wealth away from the productive sector of the economy,’ says Professor Leishman.

‘To make large cities ‘work’ it will be essential to reconceive housing policies as being, in part, concerned with real economic infrastructure to facilitate economic development,’ says Professor Leishman.

‘A second step is to move away from a narrow focus on the poorest households and the homeless and to set their concerns within a broader housing-systems framework that has regard to all housing outcomes in the metropolitan area and in the nation’.

The report can be downloaded from the AHURI website at http://www.ahuri.edu.au/research/final-reports/357