Robert Braby

Candobetter.net Editor: Article updated with full submission included and relabeling of table. The Commonwealth Senate released its long-awaited report on housing affordability on 8 May last, conveniently a few days before the release of the Federal Budget. The 461 page report examined, inter alia, the many supply and demand factors which impact on housing prices and affordability, and acknowledged that supply was not keeping up with demand – an obvious and major cause of rising house prices. But the emphasis of its recommendations was that the solution lay in increasing supply rather than in reducing demand. The elephant in the room, namely population growth, although mentioned in several submissions, hardly featured in its recommendations. This is not surprising, given the reluctance of politicians to face up to the obvious but politically awkward issues of immigration and birth rates, especially with the high level of influence exerted by vested business and property interests (including the recently revealed large number of politicians who own investment property).

You can read the report in the following link: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Affordable_housing_2013/Report

My own submission to the housing inquiry argued that it is virtually impossible for supply to keep up with population growth, and that population growth is a major cause of the growing inequality between rich and poor. Read the submission below.

Submission to Household Affordability Inquiry by Bob Braby 19 March 2014

As the submissions to this inquiry indicate, there is a range of factors that can affect housing affordability in the short and medium term. But it is the long term effect of population growth that must be addressed if there is to be any lasting improvement in housing affordability. Short term band-aid measures are not sustainable. For example , increasing the supply of residential land on the urban fringe may enable the supply of housing to increase for a time , but it will also reduce the supply of raw land and eventually show up in higher land prices - and factored into future housing costs. Likewise, grants to first - home owners might provide some temporary relief , but will be self defeating to the extent that they also increase demand and house prices.

It is like chasing your hat on a windy day ; just as you think you have caught it, it blows further away . You will only catch it when the wind stops.

The link between population growth and property prices is well established in research studies, although denied by those with vested interests. Elementary supply and demand theory supports these results. Supply cannot keep up with increasing demand because:

1. The supply of raw land is fixed by nature.
2. The supply of serviced land is subject to environmental constraints ; for example, in Melbourne by Port Phillip Bay and the Mornington Peninsula in the south, the Dandenong ranges in the east and the Yarra valley in the north-east .
3. Development of broad acres requires rezoning to residential, but governments choose to restrict this to prevent urban sprawl.

4. Most people prefer to live close to the CBD rather than on the urban fringe, to take advantage of recreational, cultural and sporting facilities and employment opportunities. But the supply of vacant land in the inner and middle suburbs is very limited. In addition to the effect on land prices, this may lead to increased density in the form of high-rise development with increased building costs (per unit of net floor area), thus exacerbating the effect on affordability.

The effect of these various supply constraints is a steady increase in real land prices over time, as illustrated in some of the submissions to this inquiry and in a study by myself. Note also the high correlation between population size and land prices in our capital cities, with the exception of Darwin. But Darwin is bound by water on three sides and subject to severe environmental constraints as mentioned above.

The net effect of population growth is therefore a downward effect on household affordability . Worse, increasing house prices flow on to higher rents, with low-income people locked out of the housing market and trapped in a vicious circle of rent dependency and poverty. These unfortunate people do not share fully in the benefits of productivity growth, because improved wages over time are offset by higher rents. This can be illustrated by the following table, which shows three categories of people who may or may not benefit from economic growth.

[Editor comment: title of table changed 22 May 2015 to correct a transcription error.]

People who are employed and own their own house (col.2) benefit from productivity growth and are insulated from rising property prices. Those who are employed but cannot afford a house (col.3) benefit from productivity growth , but these benefits are eroded by increasing real rents induced by population growth.

Pensioners who do not own their own home (col .4 ) lose both ways and are at the mercy of government.

Governments need to drastically rethink the harmful effects of population growth, not only on housing affordability but also on the built and natural environment.
Robert Braby
19.3.2014

Plan Melbourne is the latest by the latest Victorian government to attempt to accommodate forced population growth. This article examines the economic propositions entailed in the plan. The fundamental failure of Plan Melbourne is that it is driven by a political imperative to maintain rapid population growth. Developers and some industry sectors will benefit, but to the detriment of the general public. ...Planning solutions, whether they be decentralisation, intra-urban dispersion, environmental pricing or other strategies face too many political and implementation difficulties to be successful. Reducing the rate of population growth, on the other hand, would make the planning tasks so much easier. Excessive growth requires massive infrastructure costs and borrowing requirements that will jeopardize Victoria’s AAA credit rating. Most AAA-rated countries have little population growth and modest infrastructure needs.

[Candobetter Editor:This video is from the Plan Melbourne page and gives an animated plan of what the government wants for Melbourne to 2050. There is no exit plan after that; it is as if population growth will magically stop in 2050. In fact, it is likely to be even faster then due to internal dynamics created by early engineering plus the larger base.]

My overall impression is that this plan will fail because it does not embrace some fundamental principles of urban economic development. My concerns are as follows.

Decentralisation: In 1965, leading urban economist the late Max Neutze, in his book Economic Policy and the Size of Cities, developed a theory of selective decentralization based on the observation that Australian urban centres were either too large or too small, and therefore population growth should be diverted away from the larger ones to smaller ones. But because of the prevalence of market imperfections in urban development, namely externalities, imperfect foresight and imperfect co-ordination, the free market could not do this without government assistance.

He tentatively suggested that the optimum size of a major city in terms of efficiency and liveability was between 200,000 and one million, and that decentralization policy should aim to push the new regional centres towards that level. But because only a few regional centres could reach such size, decentralization must be very selective, perhaps to only two or three centres in Victoria that are already large enough to provide their own momentum – e.g. Ballarat, Bendigo. Eventually they will become large enough for growth to become self-sustaining and for government assistance to be withdrawn.

Plan Melbourne fails here in two respects. Firstly, it accepts that Melbourne’s population will continue to grow and exceed optimum, with escalating adverse effects on efficiency and living standards. Secondly, it has too many growth centres, many of which are far too small to reach optimum size, even with permanent government assistance. Selection of unviable centres merely diverts resources away from more viable centres and reduces their chances of robust growth.

The multi-nodal alternative: In 1972, I adapted Neutze’s theory to the internal structure of cities, on the observation that most of the problems of overcrowding occur in or near the central business district, while centres in outer suburbs are too small to provide an adequate range of commercial, financial and recreational services. That is, commercial centres within cities were either too large or too small, and therefore an objective of planning should be to divert economic activity away from the CBD to a few outer suburban centres, which would be assisted to grow to a size which would eventually provide a range of activities similar to those offered in the CBD. Again the policy would be selective – perhaps for two or three carefully selected centres – and based on a similar understanding of market imperfections as identified by Neutze. In 1972 the multi-nodal (or polynuclear) concept had been an established principle in town planning and geography literature, but had not hitherto been developed in the economics literature.

Again, Plan Melbourne fails to embrace the selective principle, despite its underlying logic. Selection of too many centres ensures that none of them will succeed and that the city centre will continue to expand, as envisaged in the Plan.

Increased urban density: There is ample anecdotal evidence and formal research to suggest that increasing densities beyond optimum levels adds to inefficiency, reduced liveability and housing affordability problems. Pro-growth optimists constantly claim that problems of congestion and over-development can be solved by good planning and expansion of infrastructure, but do not acknowledge the time lags and huge costs this will entail. For example, the massive construction costs of underground tunnels, desalination plants and high-rise buildings are clear examples of agglomeration diseconomies resulting from over-development.

Furthermore, medium density housing, retail developments and major road projects frequently attract public opposition because of their impact on local amenity. Research that I have done reveals a negative correlation between income and density – that is, as people become wealthier they generally prefer to spread out to take advantage of the benefits of parks and gardens, peace and tranquility, car parking and open space.

Another disadvantage of increasing densities is that the population pressures causing them force up housing and rental costs, pushing low-income earners out of the property market and into a poverty trap.

Plan Melbourne fails badly here, and is certain to exacerbate the above problems.

Conclusion: The fundamental failure of Plan Melbourne is that it is driven by a political imperative to maintain rapid population growth. Developers and some industry sectors will benefit, but to the detriment of the general public. In the 40 years since I did my original research I have seen Melbourne gradually deteriorate, as traffic congestion worsens, commuting distances lengthen, environmental damage continues, water restrictions intensify, more people are priced out of the housing market, successive governments fail to keep up with infrastructure requirements, outer-urban agricultural land diminishes and public opposition to over-development increases.

Planning solutions, whether they be decentralisation, intra-urban dispersion, environmental pricing or other strategies face too many political and implementation difficulties to be successful. Reducing the rate of population growth, on the other hand, would make the planning tasks so much easier. Note also Tim Colebatch’s argument that excessive growth requires massive infrastructure costs and borrowing requirements that will jeopardize Victoria’s AAA credit rating, whereas “most AAA-rated countries have little population growth and modest infrastructure needs” (Melbourne Age, 15.10.2013).

Robert Braby