Amongst the many reasons for rapid price escalation in housing over the past 4 decades is the restructuring of the spatial economy.

These forces have effectively squeezed down the available stock of land for housing development.

The following chart shows the relationship between median house price and distance from the CBD for metropolitan Melbourne.  This is depicted for four points in time, each separated by a decade, from 1990 through to 2020.

Figure 1: Median House Price (measured at suburb level) versus distance from CBD – Melbourne

Source:  SGS Economics & Planning Pty Ltd

We had a vastly different national economy 3 decades ago.  There was a higher level of physical goods production, accounting for around 1/3^rd of the economy.  Business services, like accounting, financial brokerage, marketing, design, strategic planning, legal advice, management advice, human resource management and IT support, comprised around 15% of national income.

Back in 1990, median house prices in metro Melbourne did increase with increasing proximity to the CBD, but the gradient was very modest. There was some advantage in living close to the city centre as it hosted higher order functions such as specialized medical care, flagship cultural and sporting institutions and, typically, the headquarters of government, the banks and other major corporations.  But 30 years ago the suburbs were also rich in high paying jobs as well as all the usual household services such as retail, education, and routine health care.

By 2010, the house price premium associated with proximity to the city centre was much more pronounced. For example, in 1990, the median house price at 5km was 1.6 times greater than that at 60km, whereas by 2010, this ratio had climbed to 3.

In part, this movement reflected the sheer expansion of the metropolis. The stock of centrally located urban land in a city of 4.1 million – metro Melbourne’s population in 2010 – will inevitably be more valuable than the equivalent stock in a city of 3.1 million (Melbourne’s 1990 resident headcount).  This said, the restructuring of the economy also played a significant part in boosting the house price gradient.

The two decades post 1990 saw a rather sudden shift in the way we earned our living as a nation.  There was a rapid ‘unbundling of the value chain.’  A significant amount of goods production moved offshore to lower wage locations.  For the manufacturing which remained in Australia, there was a strong move towards outsourcing for specialized business services.  Office-type functions once carried out within suburban manufacturing locations were increasingly bought in from specialized providers in IT, accounting, training, marketing and the like.  Some of these specialized providers developed significant interstate and international markets for their services as well.  As a result of this unbundling process, business services had grown to account for around a quarter of national income by 2010, while the share of goods production had sunk below 30%.

The specialized business services which prospered from this structural economic shift were (and continue to be) reliant on advanced and targeted cognitive skills for their competitiveness. This relentless quest for ‘knowledge workers’ drew these firms into in-board locations in the metropolis.  The central city, especially in a metropolis dominated by a radial road and public transport system, offered the best prospect of securing the specialized skills required by these businesses.

As the metropolis spread outwards, it continued to generate personal services jobs in the suburbs, but increasingly, higher paying jobs in outsourced business services gravitated to the central city region.  This region, already privileged via the radial tram, train and road network, and already hosting historic headquarter functions, gained still greater weight in the economy generally.  This weight or massing is reflected in the ‘Effective Job Density (EJD)’ index.  The EJD score of a particular locality or suburb is given by the number of jobs located in that area, plus all the jobs that can be reached from that area, divided by the travel time in reaching them.  The dominant position of the central city region in jobs access is clearly evident in the following map.

Figure 2: Effective Job Density – Metropolitan Melbourne

Source:  SGS Economics & Planning Pty Ltd, ABS data

The central city, and suburbs with good access to it, took on a new and compelling advantage as households sought to position themselves to optimize their accessibility, not only to retail, educational, recreational, and cultural opportunity but also to the most successful, best paying, sectors of the economy.  House prices in locations well connected to jobs were bid up accordingly.  Indeed, variations in EJD account for around two thirds of the variation in house prices in metropolitan Melbourne.

Figure 3: House prices versus EJD – Metropolitan Melbourne

Source:  SGS Economics & Planning Pty Ltd

With value chain unbundling and the rapid rise of business services as an economic driver, the price premium attaching to inner city proximity escalated rapidly, shown in the upward leap made by the 2010 house price to CBD distance curve in Figure 1.  Because of the interlinked nature of housing markets, this premium ultimately affected house prices further out, albeit to a lesser extent.

By 2020, the restructuring of the economy favouring business services had largely run its course (Figure 4).

Figure 4: Industry Gross Value Added

Source: RBA ( Structural Change In The Australian Economy (rba.gov.au) )

This may help explain the ‘stabilisation’ in the relative price premium affecting inner urban housing over the 2010 – 2020 period (see Figure 1).  Nevertheless, the impacts of economic restructuring now appear to be baked into the housing market. Workers today are faced with a difficult decision –  to pay a premium on housing to locate near Melbourne’s highest paying jobs, to sacrifice a portion of their potential income for more affordability, or to travel greater distances in order to achieve both.

In addition, by comparison to the 1990s, it is now a much greater challenge to move in-board on the back of equity accumulated in a relatively affordable home on the urban fringe.

A jobs lens on housing prices helps unlock an apparent paradox. Australia seemingly has abundant land for urban development, but for the past decades, it has recorded amongst the highest housing price increases in the world. However, the structural economic changes of the 1990s have resulted in a confined pool of favourable housing land in the nation’s major cities, as exemplified in Melbourne.  This land is becoming increasingly scarce and in-demand as the population continues to grow.

By Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd
and Tom Lucas, Consultant, SGS Economics & Planning Pty Ltd