THE NEGATIVE EFFECTS OF URBAN AGGLOMERATION ON HOUSING AFFORDABILITY IN AUSTRALIA

This study assesses the impacts of continued population growth in the largest Australian cities on housing affordability. Using data from the Australian census and other complementary sources over the period 2001-16, we estimate a system of seemingly unrelated and spatially lagged regressions to identify the relationship between a city's population size on the one hand, and average wages and housing costs on the other, while controlling for the confounding influence of other geographic, demographic and economic determinants. We find that annual home sales values have risen roughly thirty times faster with population than annual full-time wages across Australia. An increase in the population of an urban area by 100,000 would increase annual fulltime wages by roughly $150 and annual home sales values by roughly $4,800. Our analysis also finds that real wages have not kept up with the high costs of living in large cities. For example, our model predicts that, ceteris paribus, price-to-income ratios (PIRs) in Greater Newcastle could rise from 7.0 to 8.4, if the city grows to the size of Sydney. And PIRs in Sydney themselves could rise from 13.6 to 14.8 by 2056, if the city grows to its expected size of 9.2 million. Relatedly, we find that there are no wage benefits to urban areas situated in close proximity to a large metropolitan centre, but these areas are more likely to have expensive local housing markets due to spatial spillover effects.