Learning to live with less

Population growth has been a mantra of our property industry for as long as I can remember. And once again there are predictions of a surge in growth, driven (this time) by people allegedly fleeing Victoria. However, there are good reasons to think this may not happen, and that we may need to prepare for an extended period of minimal growth. This may not be a bad thing.

One of the first things to understand about our recent rates of actual and predicted future population growth is that they have been extraordinary in terms of the actual numbers and also in terms of the rate (speed) of growth. On a global scale, our forecast rates of population growth in major cities exceeded many leading world cities and was on a par with places like Shanghai and Beijing. In just 15 years, Brisbane, Sydney and Melbourne were predicted to grow by around a third – roughly three times the rate of growth of cities we often like to compare ourselves with like Copenhagen (for some reason), Los Angeles, San Francisco, London or Paris.

Given we started this forecast period with widely acknowledged urban infrastructure deficits (failing to keep up with population growth in the past), how we were supposed to not make the problem worse with these rates of growth is something smarter people than me might like to explain. Let’s just say the Chinese do things very differently so we can’t use Shanghai or Beijing as comparisons.

These predicted rates of growth were driven by three components: international migration (net overseas migration or ‘NOM’); interstate growth (net interstate migration or ‘NIM’) and natural growth (more births over deaths). And all three now look severely compromised by the policy responses intended to manage Covid.

In Queensland’s case, NOM has grown in importance in recent years, now accounting for more than a third of our population growth. However, with the closure of international borders, there’s been a virtual halt to 457 work visas, along with foreign student visas. Net overseas migration to Australia – Queensland included – will slow from record numbers to a trickle. This is likely to recover but unlikely to recover to pre-covid levels for some years: rising unemployment in Australia would not be helped by importing more labour on work visas. I cannot see a Federal Government supporting NOM at the same levels as we have seen in recent years when so many Australians themselves are out of work – something sadly that’s unlikely to change for a few years yet.

The rate of natural population increase is also significant, and typically stable. It has sat at around 30,000 per annum since 2016. There are two schools of thought here: lockdowns and work-from-home will lead to a post Covid baby boom (for obvious reasons) or that the post Covid recession will see fewer people plan on starting families until their financial futures are more certain. I can see a bit of both – an initial baby bump possible at year end after the March-April lockdowns, followed by a slowdown in births as the full implications of the recession sink in. In short, less growth from natural increases is my punt, for the foreseeable future.

The final source of population growth has been net interstate migration and this is where some are seeing hope of significant growth. The numbers of net interstate migrants to Queensland has been increasing since the 40 year lows recorded from 2010 to 2014, but will this continue?

There are a few things to keep in mind here. First, when NIM reached levels of 1,000 a week (around 50,000 per annum) in the late 1980s and early 1990s, Queensland’s total population was around 2.4 million. Today it is around 5 million. To have the same proportional impact, we would need to see NIM rise to around 80,000 per annum – and we are a very long way from that.

Second, there has been a close correlation between periods of high net interstate migration and periods of economic prosperity in Queensland. People did not come just for the weather or the lifestyle (attractive as these were) but they came in numbers when Queensland’s full-time jobs growth was strong, even stronger than NSW or Victoria.

There have been recent media reports speculating about Victorians (in particular) seeking refuge from Covid impacts in their home state and moving to Queensland. I don’t believe the media reports will reflect significant real numbers for the reason that Queensland’s full-time jobs growth has actually been negative in the last five years and anaemic in the last ten.

It’s important to look at full time jobs because these are the things people need to secure mortgages and to provide family security. Much has been made of the Gig economy, but part time and casual jobs are particularly vulnerable in recessions and especially to downturns in Covid-sensitive industries like hospitality, travel and tourism. Which happen to be synonymous with Queensland.

Would Victorians (for example) logically leave a state that has produced more full-time jobs than any other in the last five years for a state that now has fewer full-time jobs than five years ago? I have heard some in the property industry argue that if you had to be unemployed, where better than in Queensland. Which is true, but is this what we want? Migrants arriving without jobs to go to or limited prospects of getting any in the near term isn’t helpful. This won’t stimulate our economy but will add to the drain on services in costly areas for governments (meaning taxpayers) like health and education. Fewer full time employed taxpayers and a rising population of dependent unemployed is not a recipe for economic growth. Property professionals spouting this line need to take a long, cold shower. All population growth is not alike.

So each of three sources of population growth looks challenged in a post Covid Queensland, for the next few years at least. Less NOM, fewer NIM and less breeding.

Is this such a bad thing though? Provided we continue with infrastructure projects, it could allow the State to begin to close the infrastructure gap which has widened significantly in recent decades. The pressure is everywhere to see – rising congestion, hospital waiting lists, rising school class numbers, and hostility to development generally. If Covid forces a breather on the rapid rates of population growth we’ve been used to, perhaps it will mean we can actually enhance our quality of life and standards of amenity in the process?

It’s also worth keeping in mind that there are many global examples of low growth cities and regions which remain highly attractive and economically prosperous. The surplus of demand by people wanting to live and work there, relative to supply (deliberate limits on housing supply and population caps) invariably makes these very expensive real estate markets, completely unaffordable for many. But from a selfish property market point of view, they are still viable markets for development and redevelopment. Locally, think Noosa. Being horrendously expensive for residential or commercial property hasn’t stopped some of our other property markets before?

 

So many levers, why don’t we use them?

In the pursuit of suburban and regional renewal, have we fallen into the trap of thinking this is a responsibility for local governments? Have we become too reliant on local government powers to provide incentives to attract and stimulate development – things like density bonuses, rates relief, infrastructure charges relief – without lifting our thinking to wider opportunities to support targeted geographic areas? Are we relying on too few of the levers actually at our disposal?

Local government development incentives can be highly effective, as Brisbane City Council showed when it targeted the limited supply of 5 star hotel rooms across the city some years back, along with student housing and seniors housing. Each sector was offered specific incentives designed to bring forward proposals for adding to supply in that sector, in support of city-wide economic development objectives. It worked, although it wasn’t intended to support specific geographic areas within the city.

On a wider geographic level, these can become more problematic: some local governments lack the resources to provide sufficient stimulus options to make much difference to a project’s viability. And some location-specific initiatives within one local government boundary might offer region-wide benefits, but neighbouring local governments are unlikely to chip in out of a sense of noblesse oblige. There are many other valid reasons why the task of economic attraction shouldn’t be delegated entirely to local governments.

Let’s take a hypothetical example of an outer suburban or regional business district which has seen better days. Picture plenty of ‘For lease’ and ‘For sale’ signs – some of the signs old enough to warrant a heritage listing in their own right. Regional plans may identify it as a centre of wider employment potential but without strategic policy support beyond the reach of local government those sentiments are unlikely to be realised. Somehow the ‘planning’ and the ‘doing’ never quite align. Our business district continues to promise potential but nothing much changes.

If asked what’s needed to turn that around, I suspect many of us would think the first order priorities are physical – infrastructure and placemaking upgrades being top of the pops. These things are unquestionably important in business attraction and centre renewal but, for the sake of argument, what other levers could be applied? What other things could we do to make a particular suburban or regional business district more appealing as a place to base jobs?

For starters, we often overlook the impact of utilities providers on the costs of both doing business and developing new assets. Many years back, these were public utilities and some – such as water and sewerage – were local government owned. Today many utilities providers work to a set of objectives which do not include business attraction or incentivising development. Nor do they respond to the economic development wishes of their former owners. But their cost structures for new or upgraded infrastructure can add significantly to local project costs and hence detract from the ability of getting our hypothetical run-down centre up to speed. A new project in our renewal centre will be competing with other existing centres where services are already in-ground, and not as fully priced into the location costs; which puts us at an immediate cost disadvantage. If we are serious about making outer suburban and regional centres competitive, is it valid that we leave utilities off the team?

Another lever we usually don’t engage in incentivising regional or suburban renewal is the tax lever. Payroll tax for example is levied at the same rate whether you are major accounting or law firm in a CBD tower, or a mid-size business in a suburban or regional location. Same payroll value, different locations, same tax bill. (Payroll tax in Queensland kicks in at $1.3million per annum in wages and is 4.75% for up to $6.5m per annum and 4.95% for over $6.5m per annum. The Queensland Government introduced a regional discount in 2019 - of 1%. It's a start but unlikely to to be deal maker. It also doesn't apply to outer suburban or regional areas within South East Queensland). If our aim was to make our run down outer suburban centre or regional centre more attractive to a cross section of businesses, is there any valid reason we couldn’t offer payroll tax exemptions based on place of business? (Sure, there’s a risk that some will set up “post box” locations to exploit initiatives like this – there always are. But consider that the opportunity cost of the lost revenue is relatively small if confined to specific locations, plus the specific geographic location ought to make validity checks relatively easy? This could actually be an easier tax measure to police than many already on the statute books).

And if a “horses for courses” approach with payroll tax to favour specific places of work is a potential lever, why not a similar approach to things like land taxes, depreciation rates or the big one – income and company taxes?

Let’s imagine our run down regional or outer suburban centre given the collective support of Federal, State and Local Governments, along with utility providers. Bring your business here and pay a concessional rate of company tax, your workers will receive extra income tax rebates based on location, your payroll taxes are zero, you are offered accelerated depreciation on built assets and fixed equipment, land tax is half what you would pay elsewhere, while energy, water and other utilities are less than what you’d pay in a major centre. Plus the housing for your workers is plentiful and affordable. I’m writing the economic development pitch already!

It’s only a crazy idea because we’ve never really been fair dinkum about supporting the efforts of suburban or regional business districts wanting to refresh their appeal. We have tended to assume that the inner cities are where it’s at and directed the bulk of our infrastructure investment there for that reason. We’ve also benchmarked and tuned our statewide and nationwide tax and regulatory settings to the economic environments of major centres. Little wonder that they have thrived while many suburban and regional centres have struggled.

It isn’t enough to be able to offer cheap land as the prime location incentive for regional or outer suburban areas – a tactic we often see resorted to. It’s cheap for a reason, and land cost itself is rarely the deciding factor. The cost of building in an outer suburban or regional area is either no different or (often) more expensive than building in a major centre – so you are effectively at a disadvantage from the outset. If the tax and regulatory framework is also designed on a ‘one size fits all’ basis, whether you are regionally or city based, then the odds start to become well and truly stacked against you.

We might stand a chance if we factored in the very high costs of inner urban infrastructure needed to support a highly centralised economy. For example, mass transit projects designed to ferry people to inner city workplaces are eye-wateringly expensive, but those costs are borne by taxpayers, usually without much dissent. Providing a similar ‘leg up’ to regional or outer suburban centres, in the name of a more resilient and dispersed economy that shares benefits more widely across the country, shouldn’t prove as problematic as it seems.

Nothing in this is new of course. The notion of a ‘Northern enterprise zone’ to develop the economy across the north of Australia gets a regular airing, but rarely any traction. It’s an idea that has now been floated so many times that it almost invites ridicule when it gets aired again. But surely the idea can be no less ridiculous than the notion that the tax rates and other government costs ought to be the same for businesses located in the CBDs of major cities - where they are surrounded by taxpayer funded amenity - as it is for outer suburban or regional business centres?

We need to begin to think more broadly about ways to support a more geographically diversified economy. Continued concentration of our economic fortunes into a handful of cities is a strategy fraught with risk, as we are watching play out now in Melbourne thanks to Covid-19. Geographic diversification is no longer an economic or planning pipe dream – it’s a matter of national economic security.