Real House Prices by Distance from the CBD 2009/10 dollars (source: Yates)

Last week Alan Kohler wrote a story for Business Spectator, Australia’s train to nowhere, arguing that the failure of Australian governments to invest in public transport, particularly rail, has favoured house prices near the centre. (1)

Drawing on recent research published by the Reserve Bank (see first exhibit) he says the reason inner-city prices have gone up much faster than the outer suburbs over the last 30 or so years is because a lack of infrastructure spending has made it unviable to live further out.

Australia is a big country; it should have a network of fast and efficient trains linking widespread suburbs, but instead we are crowding into the inner suburbs and paying exorbitant prices so we don’t have to commute more than hour to work each day.

He presents a chart in support of his theory showing combined federal and state government expenditure on roads over the six years from 2008-09 to 2014-15 significantly exceeded that on rail (see second exhibit).

The first exhibit shows two interesting things. One is real house prices in the capitals have increased at all distances from the CBD since the 1980s; the other is that prices increased a lot more closer to the CBD i.e. the curves got much steeper. I’m only going to directly discuss the latter on this occasion.

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I agree the standard of rail infrastructure connecting the suburbs with the CBD has something to do with the change in slope, but I doubt it’s the major factor as Mr Kohler seems to suggest. In fact I doubt it’s even an especially important part of the explanation.

One reason is the journey time by rail from the suburbs to the centres of Australia’s capital cities hasn’t in general gotten significantly worse or better over the last 30 years. In fact in Melbourne, it hasn’t changed appreciably over the last 72 years or, I suspect, since suburban services were electrified (see Have trains gotten faster?).

And rather than deteriorating, the level of service of the rail system has gotten measurably better in most cities over the period under consideration here. Frequency and span of hours have generally improved significantly and the number of express services has increased.

Jobs growth over the period has also favoured the suburbs. In Melbourne, for example, around 70% of jobs are now more than 5 km from the CBD and four fifths of them are in relatively dispersed locations. Melbourne’s CBD only has around 15% of all jobs in the metropolitan area.

I don’t doubt that the dramatic increase in the value of properties closer to the city centre shown in the first exhibit is the response to increased demand, but I think there are other possible explanations that are more convincing than the historical level of investment in radial rail.

One is that the ratio of dwelling supply to demand has deteriorated much faster in the inner city over the period than it has in the suburbs. That’s in large part because existing residents in established suburbs tend to object to redevelopment.

In the outer suburbs there’s more land without neighbours, more owners who’re motivated to sell, and fewer constraints like heritage and industrial contamination.

It’s also in part geometry – the area of a circle (or half circle) increases exponentially with radius, so there’s less land that might prospectively be (re)developed as you get closer to the centre.

Another possible explanation is that, rather than being a function of accessibility by train to the CBD, the slope of the curves reflects differences in accessibility to a range of destinations, especially by car and in some locations by foot.

With increasing traffic congestion, locations closer to the centre give better access to the denser stock of facilities and services across the inner city and inner suburbs. Factors like higher incomes and demographic changes mean the “consumer city” function has become more important.

A third possibility is the increasing desire of the well-heeled and educated to want to live close to like-minded people in the inner city and inner suburbs. This homogenisation by education, values and income is vividly illustrated by the extraordinarily high Greens vote in inner city areas as compared to the rest of the metropolitan area (and has parallels in the US – see here and here).

There are other explanations too e.g. in most capitals it costs less to build housing in outer suburban areas than in denser areas. Also see Why did the inner city gentrify?

There are good reasons to increase investment in rail connecting the CBD to the suburbs but I don’t think it would be likely to bring the slope of the curve down appreciably. Rail infrastructure is costly and getting governments to pay for it is hard; it’s vital that the investment objectives are clear. (2)

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  1. If the link to Business Spectator is met by the paywall, try linking via Twitter.
  2. I expect a dramatic improvement in rail technology that (say) halved travel times could have a big effect on the slope of the curve but there doesn’t seem to be anything that might plausibly do that waiting in the wings for urban rail.
Combined federal and state spending on railways and roads (excluding private toll roads). Source: ARA via Kohler