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Evaluating Business Attractiveness of a City Through the Affordability Lens

December 2017

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. In light of the subject’s importance, the briefing studies in more detail the affordability of 10 key cities in the US.

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City affordability is an interplay between housing and transport costs, and income

Factors that impact absolute costs include demand and supply interaction, population density and city layout, and local policies. Household income is determined by labour productivity, the employment rate and household size.

Housing is the single biggest consumer spending category in the majority of 60 cities

In 2016, housing captured on average 22% of total annual disposable income in major developed cities globally. Despite higher incomes, leading cities in most developed countries feature higher housing shares of expenditure than smaller urban areas, due to expensive real estate in larger cities.

In over half of the 60 cities, transport ranks as the third or fourth largest consumer expenditure item

In 2016, transport commanded on average 10% of total annual disposable income in leading cities of the developed world. Major cities register lower transport shares than smaller ones in most developed countries, due to extensive mass transit in major cities.

Housing and transport combined commands the lowest share of total income mainly in the US cities

Cities in the US emerge as the most affordable among a group of 60 metropolises, reflecting their much higher household incomes. However, the finding rests upon treating the limit of 45% of income on housing and transport combined as the common affordability threshold. This method is subject to criticism.

In the US, New York struggles most with affordability, while Houston struggles least

An alternative method looks at whether a household can afford to pay for housing after all other necessities are covered at an adequate level. By applying this framework to 10 key US cities, the briefing finds that urban centres such as New York struggle most with affordability, while Houston struggles least.

Introduction

Scope
A list of the world’s 60 key developed cities included in the analysis
Key findings

Basic Affordability Concepts

Why pay attention to city affordability?
Affordability is a trade-off between housing and transport costs
Factors that determine the level of city affordability
Examples of studying affordability-shaping factors in three US cities

Housing and Transport Spending Trends in Developed Cities

Spotlight on housing expenditure trends
Top 20 key developed cities for housing spend and its future rise
Spotlight on transport expenditure trends
Top 20 key developed cities for transport spend and its future rise
Interplay between household income and essential living costs
Residual income: a better method to study city affordability

Affordability Analysis of 10 Major US Cities Based on Residual Income Method

Case study: Insights on affordability of 10 major cities in America
Outline of the case study
Identifying the potential size of residual income in 10 key US cities
Four broad categories that emerge from the scatter
How affordability is shaping city economies and consumer markets
Summary
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