This is a Guest Post by Geoff Cooper, Chief Economist & Director, PwC Cities Institute.
Earlier this month the PwC Cities Institute released its first report on the competitiveness of cities in Australasia over the last decade, titled Competitive Cities: A Decade of Shifting Fortunes.
The research takes a comparative approach to urban competitiveness over the last decade. It does not claim to be a definitive measure of competitiveness, which is complex and multifaceted – but uses income and cost of living to show one perspective.
As publicised, Auckland does not do well. It is the only city of eleven to experience falling discretionary income over the past decade (what’s left after tax and basic expenditure) – equal to about $5,000 or 7% of gross income (Figure 1). Figure 2 shows the annual change in discretionary income for 10 cities relative to Auckland (a positive figure means a city is doing better than Auckland).
How should we think about these numbers? Clearly, not every median household in Auckland has seen a drastic reduction in discretionary income. If that were the case, we’d know about it. The impact is a mix of opportunity and financial costs. For long term residents in Auckland, much of the change will probably go unnoticed – realised only by moving to another city. For Aucklanders that face marginal costs (think renters, homeowners that bought after 2016 and those workers Auckland is trying to attract), these impacts might hit the bottom line.
The largest changes have taken place since 2012, when a chasm began to emerge between Auckland and elsewhere (Figure 3). Unsurprisingly, this coincides with a big outflow of Aucklanders to New Zealand’s other cities (Figure 4). Net international migration into Auckland remained strong over this period, probably because international migrants do not face the same economic circumstances as the median Aucklander.
The most obvious culprit for Auckland’s poor performance is housing, which Auckland has let get away. Under certain mortgage assumptions (which we standardise across cities), it works out to be about a 15% increase in mortgage payments between 2008 and 2018 (Figure 5). That doesn’t look so bad, until we compare it with other cities. For example, Brisbane, Adelaide and Perth actually experienced lower estimated mortgage payments over the period, with falling interest rates more than offsetting house price rises.
It’s not unusual for commentators to explain Auckland’s housing costs away, arguing that Auckland is an attractive, growing city, and attractive cities are popular and expensive. As the argument goes, it’s just demand and supply – and there is only one Auckland. But Adelaide, Brisbane and Perth are all rated top 25 liveable cities in the world, are a similar size to Auckland and are all growing at a similar or faster rate than Auckland. The comparison challenges the idea that Auckland’s housing costs are an inevitable consequence of its urban stature. As other economists have pointed out, regional policy is at play.
If housing costs are too high, income is too low. Auckland’s median household income growth lags New Zealand’s other cities, meaning the difference between Auckland and other New Zealand cities is narrowing (Figure 6). This might be explained by some combination of a smaller share of economic growth going to labour in Auckland, falling relative productivity, or because of changing demographics and population, that shift the earnings distribution.
Rising food and transport expenditure is another driver. The Household Economic Survey is a blunt tool for evaluating these effects due to limited spatial representation and granularity and it misses out some significant costs (such as time spent in traffic), but the high level numbers are enough to think that more research is needed to understand why food expenditure is rising faster in Auckland than elsewhere. Is this a price effect or because Aucklanders are spending more on food? What role, if any, does the rising price of land play?
Rising transport expenditure is another driver, for which spatial patterns can help characterise. Residents solve transport and housing costs together, so that for a city with high house prices and significant supply constraints, you might expect residents to search out low land prices at the expense of higher transport costs. This is exactly what we see in Auckland, where many areas outside urban Auckland are growing faster (about 43% faster). In some cases the rates are mind boggling. For instance, Pokeno has grown at an annual average rate of some 23% each year since 2012 (Figure 7 – although Pokeno doesn’t fit on the chart). At that rate, a population doubles every 3-4 years.
Much of this is consistent with Unitary Plan capacity analysis conducted by Auckland Council’s Chief Economist Unit, where capacity gains were greatest in areas with low land values (Figure 8). And where are land values generally low? Where transport costs are high. The very areas that we see growing fastest in Auckland are those with the highest rates of private vehicle ownership.
Figure 7: Urban Auckland and it Surrounding Growth Areas
Source: Auckland Council Chief Economist Unit, Insights November 2018.
From a cost of living perspective, the last decade has been challenging for many. The city has slipped behind international and domestic competitors, and for the last few years has experienced internal migration outflows. GDP per capita is a bright spot, but it is almost three times higher than median wage growth (Figure 10). Meanwhile, living costs have diverged greatly from other cities, pricing out new and vulnerable residents and pushing up transport costs to unsustainable levels for many. As I have written about elsewhere, this is a problem full of complexities – but it is one worth solving. Done successfully, Auckland can turn the page on a decade of escalating costs and falling discretionary income and return to what it does best: offering Kiwis an opportunity to enjoy the big city life.