No, «в» works better because «живе» ends in a vowel. «Живе у» would create a hiatus /eu/, while «живе в» is pronounced /ew/, which is easier to pronounce.
So the consonant-vowel or vowel-consonant rule applies to the word BEFORE the у/в
You look at both sides. :) You would still say «він живе у Львові» 'he lives in Lviv', because the cluster льв- has в in it and в is not used before clusters with в.
Also, after a pause (in the beginning of a sentence, or after a comma), you'd need to look at the word after у/в to determine which one needs to be used.