High-rise cities will boost Australia's growth

City centres are the engine room of Australia’s economy but poor town planning prevents us from making the most of them. Keeping a lid on urban sprawl will be essential to future growth.

Australia’s economic activity is highly concentrated within our cities but poor town planning and public transport services mean many Australians are unable to take advantage of the choices that offered by city-living. A shift towards higher-density, inner-city living could provide a boost to productivity and activity in the years ahead.

Australia is home to one of the largest land masses on earth but we utilise precious little of it. According to a recent Grattan Institute report, 80 per cent of the value of all goods and services in Australia is produced on just 0.2 per cent of the nation’s land mass.

The central business districts of Sydney and Melbourne, covering just 7.1 square kilometres, generated $118 billion in 2011-12 -- almost 10 per cent of all economic activity in Australia. To put this in perspective, that is around three times the size of Australia’s agricultural sector.

Few will be surprised that our cities are at the centre of Australia’s economic engine. Around 40 per cent of our population lives in Sydney and Melbourne (including both the CBD and surrounding suburbs). Add in Brisbane and you are looking at a 50 per cent share.

The table below separates state activity into city and regional estimates. Activity is most concentrated in Victoria where there are relatively few big regional hubs. By comparison, Queensland has the likes the Gold Coast, the Sunshine Coast, Townsville and Cairns, which are among our largest non-capital cities.

Graph for High-rise cities will boost Australia's growth

The concentration of economic activity within our cities is not simply driven by jobs or opportunities. The CBD is also much more productive on average than other areas. In 2011-12, the Sydney CBD produced around $100 worth of goods and services for every hour worked. By comparison, Parramatta generated activity worth only $68 for each hour worked.

The Melbourne CBD produces around $87 worth of goods and services per hour -- somewhat below the Sydney CBD -- but both cities are dwarfed by the Perth CBD, which generates activity worth around $124 per hour.

This is mostly due to the mining boom; after excluding mining, activity in Perth’s CBD drops to below $90 per hour. As a result, it is reasonable to expect that per-hour activity in Perth will begin to converge with the other major capitals as the mining sector begins cutting jobs -- though admittedly many of those jobs will be in regional areas.

The big question is, why are cities more productive than outer suburbs or regional areas? Largely it is a matter of choice.

Grattan notes that “employers are more productive when they have a larger pool of employees to draw on”. Cities also offer greater scope for employees to find the right job to meet their particular skillset, while employment opportunities are better when there is a high concentration of employers.

Unfortunately, Australian cities do a poor job of providing access to employment opportunities and matching employers with potential employees. Suburban sprawl is rife in Sydney and Melbourne, and is no less harmful among our smaller capital cities. The graph below shows the access that people living in Sydney have to jobs if they primarily use public transport.

Graph for High-rise cities will boost Australia's growth

It’s fair to say that adequate town planning has not been a high priority for Sydney but it may be improving. There has been a distinct shift towards higher-density living -- not just in Sydney but also in Melbourne and Brisbane -- and that suggests that in the future we may prioritise moving upwards over moving outwards.

Graph for High-rise cities will boost Australia's growth

Improving our utilisation of inner-city land would provide a well-timed boost for activity and productivity growth. Action should also be taken to improve the quality and use of our public transport systems and reduce time and money lost through congestion on our roads.

The Grattan report also highlights the long-term shift in Australia’s labour markets. From an agricultural hub to a manufacturing stronghold, we have now shifted towards more knowledge-intensive and specialised services.

That process will continue with the manufacturing sector set to deteriorate further in the coming years. Investment intentions among manufacturers are currently at their lowest level in around 20 years, suggesting that few firms anticipate a rosy outlook for their products. The sector will almost certainly continue to cut jobs over the next few years.

Few will be surprised that Australian cities dominate economic activity, but the Grattan report helps quantify just how concentrated activity actually is. It also poses important questions for town planning and household formation, including which areas families should look to settle in.

Notwithstanding our recent mining sector surge, Australia will continue to shift towards a more services-based economy, which suggests that activity will become increasingly concentrated within our major cities. As that happens, I expect that higher-density living will grow more popular as Australians put a premium on living where the action is.