10 Pricey Cities That Pay Off

City Focus

By Matthew Bandyk

When you pay a lot of money for something, you hope to get a lot of value in return. Despite the housing downturn and the number of cheap houses left in its wake, there is still plenty of expensive land left. According to the Global Property Guide, an online real estate investor's guide, New York slipped from the second most expensive city in the world in 2008 to the sixth most expensive in 2009. Still, an average 120-square-meter (373-square-foot) apartment in the Big Apple’s central business district costs a hefty $14,898 per square meter.

Why are people willing to pay a fortune to live in certain places? What are they getting in return for their money? According to a recent working paper from University of Michigan economist David Albouy, there's a great deal of value to be found in those high prices.

Economists look at every asset as having an "amenity value," which measures the amount of satisfaction the asset brings to its owner. For example, your home has an asset value that is worth much more than the roof it puts over your head. Also the area where you live brings with it a certain quality of life: How nice is the weather where you live? How close are you to the coast? How many cultural and recreational opportunities are nearby? These quality of life factors contribute heavily to the amenity value of a city, and they help explain why housing costs are so high in some places.

Another big component of a city's amenity value is its trade productivity, essentially the ability of a city to produce certain goods that others value. The San Francisco area has Silicon Valley. New York has Wall Street. But productivity boosters can come in other forms, too. They can include universities that produce an educated workforce, easy access to water or other transportation, and proximity to natural resources. How do these factors lead to economic amenities? Well, residents of highly trade-productive cities tend to enjoy higher wages. What's more, businesses flock to these cities to enjoy their advantages as well. As incomes and employment go up, so do housing costs.

The question of why some cities become great places to live and work is a little like asking which came first: the chicken or the egg? Did jobs and cultural opportunities follow the people who started living in these cities, or do people move there because of the jobs and cultural opportunities? Regardless of what came first, one thing is certain: Once amenities like this are in place, people follow them.

If you’re looking to live in a productive and valuable city, here are the top ten along with some reasons why they give their residents such a premium for the price:

1. San Francisco, CA

With the fourth-highest quality of life and the highest trade productivity on Albouy's list, the San Francisco area — which includes Silicon Valley — comes in first on the list of most valuable cities. The city is home to high wages, but even higher housing costs. Albouy found that housing costs have been pushed so far above the wage level because San Francisco residents enjoy premiums outside of income like great weather, a thriving local arts community, and lively neighborhoods. But the business aspects of San Francisco outshine all else. Albouy says it's often thought that small cities where workers earn lower wages are where businesses should start because costs are lower compared to cities like San Francisco. But low prices also mean low quality. "Boise is a terrible place to do business, and the low wages are a sign of that," Albouy says. Compared to Boise, "San Francisco has a highly productive workforce," he says.

2. Santa Barbara, CA

With a population of 400,000, the Santa Barbara metro area has the second-highest quality of life and third-highest trade productivity on Albouy’s list. Why do California cities appear so high on this list? Santa Barbara is a perfect example of how built-in advantages boost a city’s amenity value. Albouy found that, generally speaking, the more days of sunshine a city has each year, the higher its rent — and Santa Barbara's Southern California locale gives it plenty of sun. Another good predictor of rent: proximity to a coast. The beaches in the city that has been dubbed the "American Riviera" are very likely another reason it has such a high quality of life rating.

3. Salinas, CA

The Northern California city of Salinas isn't nearly as much of a business mecca as nearby San Francisco, yet it has the eighth-highest trade productivity of the areas Albouy examined. Again, the California climate is a big contributor to the city's high quality of life. But it's not just the sunshine and access to the coast that make Salinas and other California cities so amenable — their summers don't reach the same brutal temperatures as other warm parts of the country such as Arizona. Albouy points out that very hot weather tends to reduce the productivity of businesses and thus drive down value, possibly because high temperatures limit the ability to work. Salinas strikes a comfortable balance.

4. Honolulu, HI

It's no surprise that Albouy finds Honolulu to be an especially nice place to live, and its high housing costs reflect that. It has the highest quality of life of any metropolitan area on Albouy's list. That quality of life compensates for trade productivity that is lower than in cities such as Washington and Philadelphia, which don't have as much overall amenity value.

5. San Diego, CA

This Southern California city has the seventh-highest quality of life and trade productivity. San Diego's high value in Albouy's study is probably a product of not only its location but also the presence of many institutions of higher learning. The University of California-San Diego, the University of San Diego, and San Diego State University are all located within the city. Albouy found a strong relationship between the city's quality of life and the share of residents who have college degrees. College students and graduates "support the local arts, and they support walkable, cool downtowns," he says.

6. New York, NY

Of course, the business capital of the country has a great trade productivity that trails only San Francisco. The large number of high-paying jobs, a unique culture, a highly educated workforce, and a coastal location are all major amenities for New York. But the city has a lower quality of life rating than others like Portland, Washington DC, and the aforementioned California cities. As much as New Yorkers love their city, the sometimes cold climate appears to make it less valuable.

7. Los Angeles, CA

Los Angeles lands in the top 10 despite having a lower quality of life than any of the other California cities on this list. It's sandwiched between Wilmington, N.C. and Grand Junction, Colorado by that measure. But L.A. has the fifth-highest trade productivity, which helps it to rank just above Boston.

8. San Luis Obispo, CA

The San Luis Obispo metro area, with a population of 246,681, sits between Los Angeles and San Francisco. Thus, it shares many of the advantages of both cities, so why don't more people live in smaller California cities like San Luis Obispo? Albouy says that his study does not take into account building regulations that might make it difficult for the housing supply (and its prices) to increase. "California would have a lot more people if you can build more houses there. And that would probably be good for the country," he says, because more people could benefit from its high quality of life.

9. Boston, MA

Like New York, the only other East Coast city to rank highly in value, Boston's weather lowers its quality of life ranking. But also like New York, Boston has significant trade productivity — the fourth highest on the list, in fact. These cold-weather cities boost their value by offering well-paying jobs and very productive businesses. Innovation stemming from the high level of education among Boston's residents is just one reason the city is so productive.

10. Naples, FL

This city on the southwest coast of Florida has the eighth-highest quality of life on Albouy’s list and ranks 10th in amenity value because it's not very productive. A larger population tends to mean higher trade productivity since businesses can draw employees from a bigger base. Smaller metro areas like Naples, which has a population of 251,377, are at a disadvantage.

Copyrighted, U.S.News & World Report, L.P. All rights reserved.

Latest Articles