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The Business Attractiveness of a City Depends on the Affordability

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Life is costly in the world’s major developed cities, with closely linked outlays on housing and transport occupying a prime place in consumer incomes. How affordable a city is reveals its potential for discretionary spending, level of diversity and income inequality, appeal to the middle-class and families, as well as future economic success. Affordability of a city, including housing, transport, and discretionary spending, can help businesses determine the attractiveness of the city.

Why pay attention to city affordability?

It shows the potential of household discretionary spending. A negligible surplus in consumer spending on discretionary goods and services against the backdrop of a large income advantage in a city as compared to the rest of the country is largely explainable by the city’s unaffordable living costs.

Affordability points at the demographic composition and income inequality. Good affordability of an urban area stimulates racial and ethnic diversity. For example, researchers at Stanford found that affordable housing projects in poorer neighbourhoods attracted non-minority homebuyers. Additionally, in a different body of research, rising private property prices were shown to lead to higher income inequality. As well as pointing out demographics and income inequality, it also serves as an additional validation of the presence of the middle-class and families. Affordable cities are especially attractive to middle-income households and families. The former often do not qualify for subsidised housing but at the same time cannot afford exorbitant house prices or costly commutes. Families incur additional expenses associated with children and thus are open to relocation to bring down other living costs.

Lastly, it reveals the future economic potential of a region. Affordability of housing and transportation is an important pull factor. It is true that in and of themselves, low living costs may be indicative of a struggling city (e.g. the US’s Rust Belt); however, in combination with an abundance of jobs and relatively high incomes, affordability will attract new residents and thus boost the economy further.

Spotlight on housing expenditure trends

In 2016, housing was the single biggest consumer expenditure item in 51 out of 60 major developed cities in the world. In the remaining nine, housing was the second largest spending category. In seven US cities, housing ranks after health goods and medical services, while in two Eastern European cities it ranks after food and non-alcoholic beverages. In almost half of cities, the growth rate of real housing costs over 2011-2016 ranked as the 6th-9th fastest among 12 consumer categories. The rate was negative in seven cities, reflecting the period of recovery after the global financial crisis. By 2021, housing costs will grow in all 60 cities, with 33 seeing an acceleration in real growth compared to 2011-2016.

Major cities in developed countries, due to their stronger economic standing, generally have higher household incomes than smaller urban areas. Despite this fact, in 20 out of 30 developed countries, leading cities feature higher average shares of income spent on housing than smaller ones, reflecting the desirability of the former. In 2016, households in major developed cities across the globe devoted on average 22% of total annual disposable income to housing, ranging from 14% in Philadelphia to 30% in Auckland. In absolute terms, average annual housing costs per household stand at USD14,900, ranging from USD4,300 in Tallinn to USD29,800 in San Francisco.

Spotlight on transport expenditure trends

In 34 out of 60 key developed cities globally, transport ranks as the third or fourth largest consumer expenditure item. Spending on transport ranks second in 14 cities, particularly in Western Europe (e.g. the UK, Germany and the Netherlands); and fifth or sixth in 12 cities, particularly in the US, where costly healthcare suppresses spending on other items.

In half of cities, the growth rate of real transport costs in 2011-2016 ranked as the 9th-12th fastest among 12 consumer categories. In 18 cities, the rate was negative, as consumers experienced a hit to their purchasing power. Over 2016-2021, transport is set to record positive real growth in all cities, with 44 out of 60 predicted to see an acceleration in the growth rate. Despite higher incomes, major cities generally register lower income shares on transport than smaller urban centres, primarily thanks to higher population densities that support extensive mass transit options. Indeed, in 17 out of 30 developed countries, passenger car ownership rates are lower in leading cities than in smaller ones.

In 2016, households in leading cities of the developed world allocated on average 10% of total annual disposable income to transport, ranging from 6% in Boston to 19% in Athens. In absolute terms, average annual transport costs per household were USD6,800, ranging from USD1,600 in Bratislava to USD12,100 in Houston.

As emerges from the case study, cities such as New York have notable affordability challenges. The highly affluent but proportionally small segment of the population whose extensive discretionary spending patterns tend to mimic trends in the stock or real estate markets can make consumer demand in such places volatile. At the other end of the spectrum, in Houston, businesses in various industries – from brand name clothing, appliances, toys and pet care to education, gyms, foodservice, travelling and finance – can expect a broader base of customers, which is better for a successful performance.

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