Productivity of our large cities is at risk due to unaffordable housing

Economic growth and productivity in Australia’s largest capital cities appears to be slowing, says new research.

The Australian Housing and Urban Research Institute (AHURI) released a report with research from the University of Adelaide, Curtin University and the University of Glasgow (UK), which suggested unaffordable housing and traffic congestion in metro areas was the major concern for productivity in major cities.

In short, it’s a lose-lose situation. People can’t afford to move to the very areas that would allow them to earn a higher wage.

University of South Australia Professor Chris Leishman explained some businesses are also struggling to get the skilled staff they need at the wages they can afford to pay, while still being 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,” Professor Leishman said.

“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 went on to suggest there was a correlation between higher population numbers and higher wages.

It measured the benefits of mass populations in small areas across international markets, with results suggesting that US cities of one million people had 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 three million inhabitants are more conducive to economic growth than larger cities.

The new AHURI research showed that the positive relationship between population and income is conditional on city population levels. This would suggest that having greater levels of population increases wage rates for smaller cities, rather than for much larger cities.

Productivity slowing down in major cities is not just an Australian problem.

In the past, most large cities around the world had productivity gains comparatively higher than the nations they are in, however since the global financial crisis (GFC) this has changed and they are now reverting to mean national rates of productivity growth.

In advanced countries such as the USA, the United Kingdom, Finland and Denmark, the growth rates in metro areas have been lower than the national growth rates (from 2010 to 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,” Professor Leishman said.

For the future, Professor Leishman suggested it will be essential to reconcile housing policies in order to make large cities ‘work’.

“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,” he said.