Affordability continues to be at the forefront of everyone’s mind, as the U.S. housing market steadies but remains more expensive compared to pre-pandemic conditions.
As the 30-year fixed-rate mortgage (FRM) has fallen from recent highs—clocking in around the low-6% range—potentially making homeownership more affordable, U.S. cities are also some of the most renter-friendly worldwide.
A comprehensive annual report by international asset management firm DWS recently highlighted the most affordable locations for renters. Researchers analyzed 80 urban markets around the world to determine what markets are most affordable for renters—a metric that has significant long-term impacts on housing development, investors and the for-sale market.
Notably, the United States is home to four of the seven most affordable cities for renters, based on a ratio of rental costs to disposable incomes, with Germany and Australia also represented at the top. Salt Lake City, Utah was the most affordable overall, with Austin, Texas ranked third, Dallas, Texas at sixth and Atlanta, Georgia at seventh.
Overall, the global average rent-to income affordability ratio rose by about two percentage points to reach 38%—meaning that the average rent is about 38% of the median income.
The report notes that the most significant driver of this increase was a decline of affordability within the existing sample, with slight influence from the newly added cities compared to last year’s sample.
With the wider range of data, the household disposable income grew by more than 2% to reach approximately $4,000. After considering both factors, the report states that the “combined impact of these two indicators is not directly quantifiable,” as they offset each other. Despite that—on average—renting has become more expensive compared to last year.
Of the 80 cities measured, 29 of them exceeded a rent-to-income ratio of 40%. Although over a third of the sample shows high affordability stress, the report notes that these results should not be viewed in isolation.
“hey must be interpreted in the context of local income levels and cost-of-living dynamics to fully understand their implications,” the report stated.
Regional disparities
Each region has their own unique characteristics, and a clear divide persists between the three major regions. North America remains the most affordable of the three overall, followed by Europe and the Asia-Pacific (APAC).
Collectively, the APAC markets have a negative score in terms of affordability but Australia stands out among the rest of mainland Asia with several cities performing well. According to the report, Europe aligns closely with the global average but its cities are often held back by “low vacancy and structural constraints on development.”
North American cities tend to have positive scores, especially in the low-density cities located within the Sunbelt. Rental pressure is slightly eased by the combined effect of high income levels and fewer constraints on development, as compared to their European counterparts.
Many U.S. cities lie on the high affordability end of the spectrum of the rental affordability ratio. In first place is Salt Lake City, Utah, where the rent accounts for 20% of the median income. Other U.S. cities within the high affordability range include Austin and Dallas, Texas—at 23% and 24% respectively—along with Atlanta, Georgia, at 25%.
Other cities within the high affordability range include Leipzig, Germany at 23%; Brisbane, Australia, also at 23%; and Melbourne at 24%. Most cities in the high affordability range for the rental ratio within APAC are located in Japan, including Fukuoka, Nagoya and Osaka.
Wealth matters
Although APAC has an overall negative score, several cities stand out due to their strong income levels offsetting the poor affordability ratios. One example is Singapore, which is ranked 59th on the rental affordability ratio out of the 80 markets examined. Singapore is ranked clearly in the low affordability range for ratio, but it is ranked first in terms of remaining disposable income after rental payments with more than $8,000.
“Unsurprisingly, these wealthy cities generally benefit from high income levels and relatively balanced housing costs, enabling residents to maintain strong purchasing power after rent,” the report states.
The report notes that San Francisco demonstrates a “pronounced concentration of ultra-high-net-worth individuals, with over 500,000 millionaires and approximately 80 billionaires.” The median household income in San Francisco greatly supersedes the national average, yet—coupled with above-average rent prices—the city lies in the average affordability range for rental ratio.
North American cities may be considered more affordable, but high-density areas are not immune to impacts of limited space and high demand, according to the report. Some of the busiest cities in each of the three regions are within the low affordability range for rental ratio. Hong Kong has a ratio of 61%, New York is at 53% and London slightly better at 52%.
While each region tends to fall within certain areas of the affordability spectrum—North America in high affordability, Europe in the middle and APAC in low affordability—every region has at least a few locations in each area, with year-over-year differences becoming more pronounced.
“Notably, cities in the lower half of the ranking experienced a sharper decline in affordability ratios compared to those in the upper half,” the report states. “At the same time, their residual spending power grew at a significantly slower pace than that of their more economically resilient counterparts.”
For the full report, click here.
