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Do ‘creative class’ cities benefit all residents?

Apart from Jane Jacobs, few urban theorists have influenced urban policy-makers as much as Richard Florida. Now he says the benefits of attracting the creative class don’t trickle down to all

Median housing cost v service class wage after housing in US cities (chart by Richard Florida)

Richard Florida is best known for his 2002 book The rise of the creative class. He argues that cities with talented and diverse populations are more successful economically than other cities.

By developing and fostering the sorts of urban amenities, culture and moral climate that appeal to the creative class, cities can generate a competitive advantage.

It’s now well established that the creative class in the US increasingly live in a limited number of (mainly) dense, high-amenity places, like Manhattan, Washington DC and San Francisco. In Australian cities, the equivalent is the inner suburbs of our capital cities.

These places exemplify the power of agglomeration. Drawing on the work of Enrico Moretti, David Brooks writes in the New York Times that these “magnet places have positive ecologies that multiply innovation, creativity and wealth”.

Writers frequently cite the attraction of density and urban amenities. Of course these matter, but the main game is networks – being near other talented, well-connected and influential people.

Silicon Valley isn’t dense or even particularly amenity-rich, but it has lots of similar people living within easy (car-based) access to each other.

The wonderful thing about these talent-intensive cities is they create “trickle-down” benefits for all residents. Wages are high not only for talented residents, but also for the less skilled.

Or so it’s often assumed. This is where the story gets really interesting – Richard Florida himself is now arguing that all might not be as rosy as it seems in creative cities.

In an article published on Atlantic Cities last month summarising a new research project, Professor Florida says there are more losers than winners in America’s new economic geography.

He and colleague Charlotta Mellander examined wages and housing costs in a large sample of US cities for three classes of workers: knowledge, professional and creative workers; service workers; and blue-collar workers.

They found workers of all three classes who live in bigger, high-skill cities earn significantly more than their peers in other cities.

Bigger metros bring powerful clustering and agglomeration effects; they have faster metabolisms and greater rates of innovation.

But once housing costs are taken into account the advantage evaporates for all but the knowledge workers. It seems talent-clustering provides little in the way of trickle-down benefits.

Its benefits flow disproportionately to more highly-skilled knowledge, professional and creative workers whose higher wages and salaries are more than sufficient to cover more expensive housing in these locations. While less-skilled service and blue-collar workers also earn more money in knowledge-based metros, those gains disappear once their higher housing costs are taken into account.

There’s a “rising tide of sorts” but it only benefits the most skilled third of the workforce. It leaves “the other 66 percent much further behind.”

It’s important to bear in mind that these correlations relate to the US and the customary caution is required in applying them to Australia. Also, Professor Florida doesn’t provide a lot of detail in his summary article – it’s not possible, for example, to unpick the effect of city size from the effect of skill.

But if the authors’ theory is right, it highlights the importance of high housing prices.

That’s been explained in the US context by observers like Ryan Avent and Matt Yglesias. High-talent cities are especially good at restricting the supply of development sites for new dwellings, leading to significant increases in the price of housing.

In broad terms, the themes are similar for Australian cities. Residents in established areas, particularly in the inner and up-market middle suburbs, seek ways to enhance and protect their residential amenity.

They have no formal “right” to that amenity, but it’s very valuable and was capitalised into the price they paid for their properties.

Limits on the supply of additional dwellings increase prices in inner city and inner suburban areas (e.g. see hereherehere and here). But they also raise prices across the metropolitan area generally. Arguably, elites have used their influence to limit supply in fringe areas too.

In order to increase the chances that those on lower incomes will benefit from the wealth being generated in the higher amenity parts of our cities, ways need to be found to lower the price of housing (it’s not only supply – there are other issues like how residential infrastructure is financed).

I’ve discussed some possible options for increasing supply before (e.g. here, here, here, here and here).

There’s also a bigger story here about the nature of inequality in the US and its geographic dimension – it’s been explored by a number of writers e.g. Charles MurrayChristopher Hayes,David Brooks. And there’s a debate about whose purposes “urbanism” serves e.g. Aaron Renn.

I’ve touched on some of these themes before (e.g. herehere and here) and will again.

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  • 1
    Strewth
    Posted February 26, 2013 at 9:19 am | Permalink

    It’s really difficult to draw any lessons from the American housing market given the upheavals it’s experienced in the past few years. But on the whole what you see in America is the result of the free market pricing desirable locations out of reach of people on lower incomes. You also see this to some extent in Australia, where the emphasis in housing policy has shifted from making housing affordable for all (with a strong emphasis on public housing) toward making real estate an attractive investment choice for middle class landlords. You see this policy play out in the increasing proportion of housing that is owned by investors rather than occupiers: and because investors generally have greater purchasing power this leads to inflated prices.

    Availability of land for housing is an issue largely confined to the Sydney basin, where the land runs out as soon as you hit the escarpment. In Melbourne there is plenty of empty land already zoned for housing: it is land banking by large developer groups that keeps a floor under suburban house prices.

  • 2
    Alan Davies
    Posted February 26, 2013 at 9:23 am | Permalink

    Strewth #1:

    it is land banking by large developer groups that keeps a floor under suburban house prices.

    Understanding how that process works and how to address it is a critical issue that ought to be a high priority for Melbourne’s new metro strategy.

  • 3
    Posted February 26, 2013 at 9:57 am | Permalink

    Alan you’ve typed ‘more winners than losers’ in the link text pointing to the article in question, rather than the other way around.

    Strewth, not entirely sure you can blame the free market here – if we had a truly free market people would build a lot more housing of varying quality & density in a lot more areas than they do now. I don’t think the result would be pretty, but it’s a pretty sure bet housing affordability would be less of an issue than it is now. I’m no right-wing laissez-faireist, but I do think there are a lot of unnecessary regulations that prevent the creation of cheaper housing in inner-city areas.

  • 4
    Strewth
    Posted February 26, 2013 at 12:12 pm | Permalink

    Dylan #3: given the VCAT light-touch approach to planning in Melbourne, what we have in the inner city is probably not too far distant to what an unregulated housing market would produce. And what we have is largely opportunistically-located apartments and townhouses targeted at those prepared to pay a hefty premium for inner-city living. The only ‘affordable’ housing provided is the limited amount imposed by the planning framework.

    Basically, in a city with a growing population and a healthy CBD job market, there is practically unlimited latent demand for inner-city real estate, and if left to the free market it’ll go exclusively to those with the greatest purchasing power. In orthodox economics this is called an ‘efficient’ outcome, and you can see it playing out all over the developing world: wealthy enclaves surrounded by shanty towns.

  • 5
    Posted February 26, 2013 at 12:17 pm | Permalink

    Strewth, I’m not so sure – there’s been some very solid arguments put forward that one of the main reasons only higher-end apartment blocks get built is because excessive regulations make lower-price dwellings uncompetitive. And only developers with clout to overcome government-backed NIMBYism actually get to build anything.
    However I agree that government intervention is required to ensure that sufficient housing for lower-income households is available.

  • 6
    Tom the first and best
    Posted February 26, 2013 at 1:22 pm | Permalink

    One of the biggest regulatory hurdles on housing construction, especially with high density, is the minimum parking requirements. They are expensive because they take up space, and whether they are dug down or just in the lower floors of a building they require a significant quantity of building materials to build.

    Spare not devoted to parking is space that can be used for extra housing (as long as it is not underground).

  • 7
    Alan Davies
    Posted February 26, 2013 at 1:42 pm | Permalink

    Urbis tweeted this today: The National Housing Supply Council’s final report on Housing supply responses to change in affordability (I haven’t read it yet so I’m not endorsing it)

  • 8
    Posted February 26, 2013 at 1:54 pm | Permalink

    Tom, definitely, that one is pretty low hanging fruit, and I’m pretty sure in many inner city districts in Australia the minimum parking requirement regulations are gradually being wound back. Height and heritage restrictions are another hurdle – there’s lots of pretty shoddy-looking single-fronting single-storey terrace houses in Melbourne and Sydney that could be turned into medium-priced family-sized houses if it were permitted to extend them by a single storey without requiring the extension to be in the same style as the existing facade (again, I’m not proposing all height and heritage restrictions are a bad thing, just that many of them are excessive and making it hard to add additional housing capacity, pushing up prices for everyone).

  • 9
    hk
    Posted February 26, 2013 at 3:35 pm | Permalink

    Richard Florida through his home page http://www.creativeclass.com/ focuses his skillful and motivating commentary on urban activity and theory on the Creative Class. He defines the creative class component for cities as comprising a “creative index that contains the combined presence of technology firms, talented individuals, (the percentage of people in the city with at least a college degree) and various measures for tolerance (bohemians, ethnic diversity and gay populations)”. Other scholars such as Hoyman and Faricy (2009) argue that social capital and human capital (intellectual capital) are the drivers behind successful growth in cities. In other words the benefits of an elite creative class will make little difference to the well being of the wider community because of their minimal impact on the economic well being of an urban region.
    As pointed by other bloggers the issue of who is doing and benefitting most from the land banking needs addressing as high priority for Melbourne’s new metro strategy.

    Reference: Hoyman, Michele and Christopher Faricy. 2009. “It Takes a Village: A Test of the Creative Class, Social Capital and Human Capital Theories”, Urban Affairs Review, 44:311-333

  • 10
    Tom the first and best
    Posted February 26, 2013 at 3:51 pm | Permalink

    8

    In Melbourne the terrace housing is largely confined to parts of the pre-1900 densely developed area and that is pretty small. Remembering that in 1900 Melbourne was about the most sprawled city in the world because of our rail based sprawl allowing a greater proportion to live on quarter acre blocks.

    The single story terraces can often be extended up at the back but not the front anyway.

  • 11
    Posted February 26, 2013 at 5:28 pm | Permalink

    Well if there are structural reasons it’s impossible to add another storey without excessive expenses, then I think we have to be a little bit willing to accept that we can’t keep all of our 19th century heritage, vital as the best of it is to maintaining what makes Melbourne special.

  • 12
    lomlate
    Posted February 26, 2013 at 10:38 pm | Permalink

    Income might be lower after housing expensive but there might be greater access to amenities in these areas which offset income issues. How good is the local high school in Silicon valley compared with somewhere with cheaper real estate and therefore less local tax revenue? And how does that feed into inter-generational equality?

  • 13
    Alan Davies
    Posted February 26, 2013 at 11:25 pm | Permalink

    lomlate #12:

    A relevant point to raise although the issue of schools reinforces the argument made in the article. Schools are funded at the local level in the US (compared to Australia) so where you live really matters. The schools in Silicon Valley are likely to be much better than those in lower income areas.

  • 14
    Tom the first and best
    Posted February 27, 2013 at 1:00 am | Permalink

    11

    I did not say there were structural issues. I said that they could generally be added to at the back but not the front and there are not actually as greater proportion of terrace houses in Melbourne as their are in Sydney.

  • 15
    Tom the first and best
    Posted February 27, 2013 at 1:02 am | Permalink

    13

    The USA rally does have a different set up to Australia. Their cities are far more specialist than ours.

    Great strides in equality could be made in the USA if school funding was run a a state or even federal level.

  • 16
    Posted February 27, 2013 at 10:39 am | Permalink

    Tom, in what way can’t they be added to at the front – because of heritage overlays? There’s still quite a lot of single-fronted single-storeyed terrace housing in Melbourne, and much of it, especially in Carlton, is in need of renovation.

  • 17
    Tom the first and best
    Posted February 27, 2013 at 4:54 pm | Permalink

    16

    Yes heritage.

    It only costs 1 or 2 rooms (possibly more if it is a double fronted house) to extend up only at the back.

    Extensions and other renovations are happening anyway and will gradually increase the size of the housing. This does little for housing affordability as does not increase the number of dwellings or significantly the dwelling occupancies (other that possibly children).

  • 18
    Posted February 27, 2013 at 6:08 pm | Permalink

    Depends what you mean by ‘significantly’. Certainly when I was looking some years back the lack of any decent family-sized properties in Carlton struck me as symptomatic of excessive restrictions. The very few that were available had prices inflated way beyond anything I was prepared to consider. On the other hand an area like Kensington where I now live has very reasonable prices for family-sized properties in comparison (and is effectively as close to the city, considering Carlton has no train service), which is obviously due to a whole range of factors, but must be partly due to the relative lack of heritage overlays etc.

  • 19
    Tom the first and best
    Posted February 28, 2013 at 3:23 pm | Permalink

    18

    It is usually possibly to extent at the back to get a family sized property. This gives up to 3 extra rooms and is thus provides a house size comparable to new units or family sized flats. There are heritage overlays over much of Kensington.

    http://planningschemes.dpcd.vic.gov.au/melbourne/maps/melbourne04ho.pdf

  • 20
    Alan Davies
    Posted March 21, 2013 at 9:57 am | Permalink

    Richard Florida concedes the limits of the creative class

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