The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, September 1, 2011

Australia’s Manhattanisation

Since 2003 I have argued that the future of Australia’s cities more likely lies in ‘Manhattanisation’ rather than sprawl, while noting that the two dynamics are not mutually exclusive. We will increasingly build up rather than build out.

The great Australian dream of a quarter acre block will gradually morph into a more convenient ‘attached’ form of housing—be that a duplex, semi, terrace, townhouse or apartment—that, critically, is situated in relatively close proximity to important amenities and places of work.

As I explained in last week’s column, Australia will likely have to absorb 2.3 million additional households over the next 15 years alone. BIS Shrapnel estimates that this translates into a new home building requirement of about three million properties once you account for demolitions and the historical share of unoccupied homes (eg, holiday houses, etc).

Sydney and Melbourne are individually expected to have 5-6 million residents (see chart). This begs the question as to where all these people are going to live. Will we build new cities, allow existing metropolises to expand ever-outwards, permit Manhattan-like densities, or embrace all of the above?

The history of our urban development offers a guide. Over the last century, Australia’s urbanisation rate has increased inexorably. In 1921 only 42% of us lived in metro areas. By 2011 that share had risen to 63.9%, and is projected by the ABS to increase to nearly 65% by 2026.

Paradoxically, Australia is one of the most urbanised countries in the world, notwithstanding our large and mostly untapped land mass. Our federated structure combined with the socio-economic power of ‘agglomeration’ has led to a single city in each state attracting most of the immediate region’s residents. Indeed, Australia has more of its total metro population living in its two largest cities, Sydney and Melbourne, than any other country save Switzerland.

Yet if you fly into Australia’s major metropolises you will find a common characteristic: with the exception of the CBD pockets, they tend to resemble flat towns. With its much higher inner-city densities, hilly Sydney, by way of contrast, offers a vision of the urban future that awaits contemporary conurbations.

Continuing to build out poses a number of problems. Every marginal addition of new land on a city’s periphery necessitates accompanying investments in roads, electricity, water, transport, and sewerage. Up to a point, densification can leverage off existing infrastructure.

The further we spread our residents, and the workers living in these households, the more we typically have to transport them back to their places of work (and thus the higher their carbon foot-print). Densification holds out hope of truncating commute times.

And in order to build out, we are, by definition, taking fresh greenfields land away from the natural environment, in order to use it for the urban one. Building up does not exhaust any new land.

Los Angeles County is a great example of a metro area that has sprawled inefficiently. The population of 9.8 million is spread across great distances with an incredibly low density of just 798 persons per square kilometer. Unfortunately for LA’s residents, the public transport system is near nonexistent. If you don’t have a car in LA, you find it hard to function. This has historically resulted in serious traffic and pollution issues, in addition to undermining the city’s sense of community. In fact, LA is more like a basket of smaller cities, which have little in common.

New York City sits at the opposite end of the density spectrum. There are 8.2 million people co-habitating in attached forms of housing with a density of 10,194 persons per square kilometer (an order of magnitude more than LA), which makes it the densest municipality in the US.

Manhattan's density is two and a half times higher again. This is, in turn, more than ten times greater than Sydney and Melbourne’s densities of 2,058 and 1,566 persons per square kilometer, respectively.

To best service its conveniently contiguous residents, New York has developed a world-class public transport and taxi system that most of its population harnesses. While it is a qualitative observation, New Yorkers also appear to possess a stronger and more homogenous sense of community. You don’t live in Hollywood or Santa Monica; you simply live in the Big Apple.

One insight from these two case-studies is that Australia’s cities clearly have scope to boost the supply of accommodation in existing urban areas (see chart). While densification has the above-mentioned advantages, it also comes with obvious costs. In particular, existing residents, who are fond of their land-rich blocks, are often resistant to change. In their defence, this may be rational: stymieing supply can inflate prices. This dynamic is exacerbated by the fact that incumbent owners typically control local councils, which regulate the zoning and building approval processes.

In my 2003 report to the Prime Minster I presented several policy solutions to the conflict of interest between existing owners, who want to choke supply, and the next generation of buyers, who would like to see it liberated. One of these ideas involved giving local governments new housing supply quotas tied to public funding. This remains an option worthy of further discussion.

In contrast to a country like Japan, which will see its population contract by one-quarter over the next four decades, Australia’s is expected to expand by 60% based on the Treasury’s projections.

With our rich endowments of natural resources that are conditions precedent for China and India to industrialise, we are lucky to be leveraged to the developing (as opposed to developed) world. This prosperous economic outlook combined with an ageing population implies that our demand for skilled labour will grow over time.

One way or another, we are going to have to find ways to accommodate 5.7 million new people in the next 15 years, around half of whom will be hard-working immigrants under the age of 40.

With this challenge in mind, it is interesting to note that perceptions of the ‘preferred’ form of tenure choice differ markedly across cities and societies. Community attitudes to housing types appear to vary according to the city’s geographic, economic and urban needs. Households in Los Angeles, Beijing, London, New York, Singapore and Sydney have quite divergent expectations with respect to the category of accommodation they hope to obtain.

I think that Australian’s understanding of tenure preference will continue to evolve. And here the data tells us an important story: whether you like it not, our cities are stealthily densifying before our eyes.

My final two charts show the share of Sydney and Melbourne building approvals accounted for by apartments, semis, and detached houses over the last 20 or so years.

In 1992 only 24.1% of all building approvals in Sydney were for apartments. By 2011 that number had risen to nearly half (or 48.4%). An even more striking story of densification is in evident in Melbourne. Twenty years ago just 4.6% of all new approvals were apartments. Today that share has rocketed to 34.8%.

Over the next 50 years our cities will densify much more than most can currently imagine. As a community we should prepare for that future today by investing in the supply-side infrastructure required to support it.