Do older Australians hate younger Australians?

This is a question that some were left pondering after attending a recent presentation by John Daley of the Grattan Institute on the urbanisation challenge facing Australian cities. Even more concerning, given the similarities between Australia and New Zealand, is whether younger Kiwi generations are also despised by their seniors.

This was of course not the explicit message that Daley conveyed to the audience attending the NZIER’s annual meeting, but it is hard not to reach this conclusion when looking at the research he presented. At the core of Daley’s argument is the fact that developed world economies are increasingly being dominated by the service sector as manufacturing moves offshore.

Even in Australia, where mining makes up a significant chunk of the country’s exports, the services employ about 70% of the workforce.

These services cluster in big cities where the rewards from proximity to other firms is greatest, particularly around the CBD. Grattan research showed that between 2006 and 2011, close to 60% of new job creation in Australia’s five biggest cities took place within 10km of the city centre. Those Australians living close to the CBD were rewarded with the greatest access to jobs, and were more likely to be better educated and receive a higher salary.

The problem in Australia, according to Daley, is that most young people looking for work in the CBD-concentrated service sector cannot afford to live there as there is simply not enough housing, particularly of the medium density sort. High prices force many younger people to look to the urban fringe for more housing affordable housing, but this has put them further away from the job market.

Grattan data shows that more than half of net population growth in the Australia’s five biggest cities between 2006 and 2011 happened over 20km from the CDB, even though only 25% of job creation took place there over the same period. Those who lived in these areas were faced with a long commute into the CBD, which had a material impact on their cost of living, increased pressure on family life and lowered their well-being.

Daley shared the anecdote of a medical technician quitting her job because the difficulties of meeting family obligations where she lived and holding down a job in the inner city were too great.

But if younger generations are the losers, then Australia’s older generations, who saw their net wealth increase substantially in the eight years ending 2012 as a result of investments in property and savings, are the winners. Not only that, but populist policies have resulted in the net cost of older households (65+) to government increasing substantially in recent years, which has to be paid for by the young through higher taxes.

This amounts to a massive wealth transfer from the young to the old, such that a younger generation is now emerging in Australia that will have less wealth than their parents, even though they save close to 10% of their income. Daley laid the blame for this wealth divide not at the feet of planners, who he said were well aware of the problem, but with the people who were benefitting from these wealth transfers: the older generations.
Constructing medium density housing in the inner city may be good for young Australians, but not so for the person who perceives that the development will have a negative impact on the value of their standalone house. This under-recognised negative externality, Daley said, is what fuels Nimby-ism (Not in My Back Yard), and drags on urban development in a millstone- like fashion.

The presentation was fascinating, but unfortunately Daley was not in New Zealand to pose solutions, but rather to invite suggestions how to fix the slow motion car crash playing out in Australia’s biggest cities. It is a problem many New Zealanders have a stake in, as it is not hard to see the same trend playing out here, particularly in Auckland. These policy solutions have yet to emerge, although work is being done on it by many of the country’s leading economic research institutes, including The New Zealand Initiative.

Nevertheless, the broad direction of the fix is evident. Firstly, mechanisms to pay off the losers from inner city development are needed. This cannot be done where legislation like the Resource Management Act allows anyone to object to a development, even when they are not directly impacted by it.

The government also needs to develop urban policies that recognise that cities are not museums but concrete organisms meant to flex and change over time. Laws that protect amenities like the green leafy character of inner city suburbs will only make the affordability problem worse, not better. Equally, as economist Edward Glaeser has shown, policies that ring fence cities from growing out in the hopes that this will fix the problem are likely to have the same effect.

Finally, and most importantly, it is the people who live in these cities that need to take responsibility for the problem. There is clear hypocrisy when someone who resists urban change in their suburb bemoans the fact that their children cannot get on the property ladder, and this needs to be exposed.

It is overstating the case that older generations in Australia (and New Zealand) do not hate the young. Everyone is someone else’s son or daughter. But if the wealth transfers from young to old that leave younger generations worse off are not addressed, it is likely that the resentment may begin to flow the other way.