Osaka is one massive, noisy pile of concrete and plastic, I don't think anybody would rank that very high as a city to live in. Downtown Kyoto isn't much to write home about either, but the areas on the periphery of the city centre where all the major temples and shrines are located are quite nice.
I would rank these cities pretty highly:
Nara: smaller city filled with tons of beautiful temples and shrines and with that great park right in the middle of town. Also close to Osaka for commuting.
Kobe: Relatively attractive city with the mountains close by and tons of stuff to do.
Himeji: (the city I live in) Himeji just has the castle going for it, but thats good enough for me.
Hiroshima: A very vibrant city with tons of stuff to do and a surprising amount of greenery downtown.