The centres of our major cities have an incredible pull on people and business. Until we break the gravitational pull, and that’s not likely, it will keep upward pressure on prices over the longer term.
You don’t have to have a degree in town planning to have a pretty good idea about how our cities are growing. It’s pretty clear.
And as Sydney pushes towards 8 million, and Melbourne 9 million by the middle of the century, it’s not clear what’s going to change those dynamics.
The way most people understand it, and it’s generally not a bad way to think about it, is like a pile of sand.
Pour sand continually into one place. Over time the pile of sand gets higher, and as it gets higher, some sand starts to run off and the pile also gets wider.
Cities classically form a pile shape, with high-rise, higher density building in the centre, with height and density tapering off as you move out to the fringes. This isn’t ever strictly true, but it’s not a bad way to think about it.
All cities start in the centre (I guess by definition), because it makes sense to the have the engines of economic activity close together.
But to round the picture out we need to imagine that most of the grains of sand want to push towards the centre. For a while, many grains of sand where happy being on the outer fringes, with hills hoists and the largest block sizes in the developed world, but now they’re pushing back towards the middle.
And the main reason for that is we haven’t done enough to decentralise economic activity. We’re over-reliant on our CBDs and surrounds. And if you worked in the city and lived on the fringes, that wasn’t so bad if the fringe was 45 mins to an hour away.
But now the fringe is 2 to 3 hours away.
That changes the economics of it radically. Let’s assume someone earns $30 an hour working in the city. If they live in the inner city, close to a train line, they can be at work in half an hour. Effective cost of commute is $15 (half an hours worth of $30) each way. $30 a day, $150/week.
(Assuming people value their leisure as much as their paid work.)
But imagine if they lived 2 hours away (a horrendous commute that a lot of people have to make). Each commute effectively costs them $60. That’s $120/day, or $600 a week!
We’re looking at a premium of $450 a week just to live in the outer fringes.
That means that if we compare two identical properties, one in the inner city, one in the outer suburbs, the inner city one will be more attractive, economically, until it costs more than $450 more than the fringe property.
So if the fringe property is renting for $400 a week, the inner city one could be renting for $800 a week, and still be, economically speaking, more attractive.
This creates a strong pull towards the inner cities.
But of course, inner and outer-city properties aren’t equal. And a lot of it comes down to whether you prefer sprawling suburbs, with hopefully some nice parks and amenities, or inner-city cafés and nightclubs.
But more and more Aussies are trading lawn-mowers for lattes, and the vibrant inner city life-style.
Even more pull towards the centre of the pile.
(and we wonder why our first home buyers don’t want to give up their inner city rentals for ‘affordable’ housing on the fringes.)
What’s more, those bits of sand at the top of the pile do a lot of talking about increasing the density of sand in the inner-city and existing suburbs, but so far haven’t been very effective in convincing the other bits of sand to let the character of the suburbs evolve to higher-rise, higher desnity formations.
So the stock of housing grows very slowly, and remains dominated by greenfield, fringe developments.
The stock in the middle barely grows at all, even though all the outer bits of sand want to live there.
And so what we get a black hole effect, where growing population simply draws more and more demand into the inner circles of the pile. The stock of housing however barely responds.
Massive demand + tight supply = rising prices.
It helps explain why we’ve seen decades of strong price growth in our major cities. And with the population expected to grow at current rates, why we’ll see decades of price pressure in the years ahead.
People often think it’s a zoning problem. That we need to free up even more land on the fringes, or convince people in the middle to wear more high-rises going up in the neighbourhoods.
But neither of these is really going to solve the problem. We need to decentralise economic activity. Australia has incredibly centralised populations and activity.
We need Geelong and Bendigo and Ballarat to pick up more the coming population boom, but so far we seem to be doing a good job of killing the only industries that get up and running in those places.
But it does seem clear that the market, left to it’s own devices, isn’t good at dealing with the problem.
We did see fringe economic centres springing up around some American cities, but only because the inner cities had become dangerous gun-slinging slums. Melbourne’s inner city hipsters and their ironic beards might be distasteful, but they’re not scary.
So it’s clear that the only way out is through courageous political leadership. Which means it isn’t going to happen.
And so that means prices will just keep rising over the longer run. It’s well under-way (but far from over) in Sydney and Melbourne. Look out for it in a capital near you!