As core urban areas in cities across the developed world have become more attractive – thanks to abundant job opportunities, leisure amenities and a host of other demographic and lifestyle factors – more people have chosen to settle in central neighbourhoods. However, a negative by-product of an urban core revival has been house price rises to unsustainably high levels, which is prompting responses from both public and private sectors.

A victim of its own success? The reality of gentrification

The intricacies of the back-to-the-city movement have been most extensively studied in the example of US urban areas. According to the largest analysis on the issue as of late 2016, performed by Nathaniel Baum-Snow of the University of Toronto and Daniel Hartley of the Federal Reserve ofChicago, stronger inward population streams in the US’s urban cores since 2000 have been made up of affluent and highly educated whites. A higher cost of living (particularly as it concerns housing), which this demographic has brought along, has priced out lower-income, less-educated racial minorities to economically disadvantaged locations of the metropolitan areas – a process called gentrification – or to less expensive metropolises altogether.

Spending on Housing: Impact of Population Density and Income in Selected Developed Cities

Source: Euromonitor International

Note: The size of the bubble represents average disposable household income in a city in 2016.

Factors determining housing affordability

Gentrification is at play across the urban developed world. However, the extent of its influence is determined by such fundamental factors as the city’s population density, average disposable income and housing policy.

As can be seen from the above chart, lower population density is associated with lower expenditure shares on housing, which is evident both within and between regions. Larger average household incomes, as is the case in US cities, additionally explain lower housing expenses as a share of total spending compared to Western European ones.

However, these relationships are not always clear cut, which has to do with the local housing policy. For example, San Francisco has by far the highest average household income among America’s 10 major metropolises (at USD183,000 in 2016), yet its housing share is nowhere near the lowest, surpassing those in Phoenix, Houston, Boston, Chicago and Washington (ranging between 16-19% in each in 2016). San Francisco’s restrictive zoning laws effectively limit the housing supply and thus worsen the affordability of homes in the city.

How developed cities across the globe respond to an escalating burden of housing costs

As principal cities in developed metropolises across the globe experience strong residential demand, local authorities, developers and residents are taking steps to ensure housing affordability:

• For instance, in 2013 Berlin banned the renting out of apartments solely for the purpose of short-term tourist stays – the practice which exacerbated the recent surge in overall rental prices in the city.
• Hamburg, similar to many other cities, explicitly sets aside proportions within substantial residential developments as affordable housing.
• Auckland with a population density of only 273 people per sq km, is undergoing extensive re-zoning of its suburban parts for multi-storey buildings, terraced housing and apartments.
• From New York to London to Seoul, a trend of co-living has taken off, whereby adult renters opt for student-type shared living spaces but with hotel-like services
• More young Londoners have also been able to combine living in some of the most prestigious addresses in town and saving money by moving to houseboats, while those not constrained by resources but rather by strict housing policies of London have been acquiring more space by digging out basements, with depth sometimes reaching several stories.

This opinion is a spin-off to a strategy briefing extensively analysing the drivers, differences and business implications of urban core revival across the developed cities.