Cities are the beating hearts of Australia’s economy. They are where ideas collide, industries cluster and opportunity multiplies. But they are also where the nation’s biggest productivity challenges and cost pressures are most visible. If we want to lift living standards, we have to get our cities right.
For decades, economists have known that when people and firms cluster together, they become more productive. Workers share knowledge, businesses specialise and innovation spreads faster. Recent research from the e61 Institute shows that Australians who live in our capital cities earn on average around $8,000 more each year. Even after adjusting for education and occupation, about half the gap reflects what researchers call the ‘place effect’ – the productivity advantage of being in a dense, connected environment.
Tracking the same workers over time, e61 finds that those who move to a city experience an enduring wage lift of around $12,000 after 7 years. Cities don’t just pay more, they make people more productive. A city is an accelerator.
But not everyone benefits equally. Knowledge workers gain the most. For trades and care workers, the advantage is smaller or even reversed. High housing costs and long commutes risk undermining the rewards of city life for many Australians.
That imbalance matters. Productivity is what drives wages and living standards. When the gains from city growth are captured mainly by property owners, while renters and younger families are squeezed out, the promise of the city starts to fade.
Across the developed world, economists have found that doubling a city’s density lifts productivity by around 2 to 4 per cent. That’s roughly the difference between Hobart and Canberra, then again between Canberra and Brisbane. These small gains compound. But they only happen when people can afford to live near jobs and move around efficiently. A high‑wage city with gridlocked roads and sky‑high housing costs can’t reach its potential.
That’s why the Albanese government has made housing supply such a central part of its economic strategy. Our target of 1.2 million new homes is not just social policy; it’s productivity policy. More homes near jobs mean shorter commutes, bigger labour markets and faster idea‑sharing.
As Minister Clare O’Neil has pointed out, it’s not fair or sustainable to expect outer suburban Australia to shoulder the entire burden of growth. The middle‑ring suburbs of our major cities already have transport networks, schools and services that can support more people. Modestly increasing their density is one of the most effective ways to tackle the housing crisis while lifting productivity. Melbourne is a case in point: over recent decades, population growth in outer areas such as Melton and Wyndham has been about 10 times larger than in inner‑city councils such as Boroondara and Bayside. Encouraging more homes around established transport corridors helps balance that load and reduces the sprawl that clogs roads and lengthens commutes.
Housing, of course, is only one part of the puzzle. Urban productivity also depends on how well we connect people and businesses. Every extra minute stuck in traffic is a minute lost to family, creativity or rest. When transport systems are efficient, workers can reach more employers and firms can reach more talent. That’s why the government’s investments through City and Regional Deals – 12 agreements backed by $9.4 billion in federal funding and $11.7 billion from partners – are designed to strengthen local economies by improving connections between homes, jobs and services.
We need to build what planners call polycentric cities: multiple thriving precincts rather than a single congested core. You can already see that future taking shape. Parramatta in Sydney’s west, Geelong south of Melbourne, Ipswich outside Brisbane and Joondalup north of Perth are all developing distinctive mixes of industry, education and culture. These are places where people can work, study and raise families without spending hours each day in traffic.
City policy is also climate policy. Urban areas are central to Australia’s Net Zero Plan, from electric‑vehicle charging corridors to the retrofitting of buildings for energy efficiency. Cities that cut emissions while creating good jobs will be the most resilient in the decades ahead. Clean energy precincts, clean transport networks and leafier suburbs will not only help the environment but improve productivity by reducing congestion and improving health.
None of this coordination is easy in a federation where responsibilities are divided between governments. Commuters don’t care who owns the road or bus route – they just want it to work. The challenge is to keep collaboration strong and focused on outcomes.
The bigger challenge is cultural. For too long, we have treated cities as problems to be contained rather than opportunities to be cultivated. Yet cities are where Australians test ideas, trade stories and build the future. As the urban thinker Jane Jacobs put it, ‘cities have the capability of providing something for everybody, only because, and only when, they are created by everybody’.
The next decade will test whether we can match our ambition with action. Technology is reshaping industries, the climate transition is accelerating and the housing shortage is biting. Each decision on transport or planning affects how Australians live and work.
If we get it right, we can create cities that are fairer, cleaner and more productive. When people spend less time commuting, breathe cleaner air and have affordable homes near their jobs, productivity and wellbeing rise together.
From Melbourne’s laneway cafés to Perth’s coastal sprawl, our cities reflect who we are – open, inventive, restless and ambitious. If we build smarter, connect better and include more people in the opportunities that cities offer, we can turn proximity into prosperity.
The power of our cities lies not just in their skylines but in their people. When we make it easier for Australians to live near work, to share ideas and to participate fully in urban life, we unleash a source of national strength. Getting our cities right is central to the story of Australia’s future.