Holidays often prompt ideas of a new life in some idyllic part of the world. But money matters and liveable, pleasant places are often pricey. Exchange rates are obviously key and the ups and downs of foreign exchange markets can deliver odd outcomes (at a village market in Provence yesterday I paid around 50% more for a week’s shopping than I would at a Waitrose in London).
While I am taking it easy, the rest of the team have been checking out the cost of living in different cities around the world, drawing on data from the Economist Intelligence Unit (EIU) and Swiss bank, UBS. Both gauge the cost of living using a basket of goods and services priced in US dollars. Slight differences in methodology, the choice of items and cities compared means that the rankings differ across the two league tables, but a number of trends emerge.
Northern European cities – Zurich, Oslo, Geneva and Copenhagen - feature at the top of the cost of living league tables. Such rich countries have high property prices, good public services and, at least in Scandinavia, high levels of taxation.
Prosperous Asian cities including Singapore, Tokyo and Hong Kong also feature towards the top of the two cost of living league tables.
Singapore is ranked as one of the world’s most expensive cities and has topped the EIU league table for five consecutive years. Personal care and basic household goods are relatively cheap in Singapore, but it is one of the most expensive place in the world to buy and maintain a car. Because it imports much of its energy and water, utilities costs are also high in Singapore.
Those cities which are the least expensive tend to be politically or economically unstable. There is some correlation between the EIU’s cost of living ranking and its sister ranking, the liveability survey. In other words, the cheaper cities tend to be the least liveable, and vice versa. Damascus features at the bottom of the EIU’s cost of living league table, followed by Caracas in Venezuela. In early 2018, the Venezuelan government devalued the official exchange rate in an attempt to reduce currency pressure but this has led to hyperinflation, which the IMF predicts will reach 1,000,000% by the end of this year.
Asia is home to some of the most expensive cities, including Singapore and Hong Kong, but also to some of the cheapest. Money goes furthest in South Asia, particularly Indian and Pakistani cities such as New Delhi, Chennai, Karachi and Bangalore. Growth rates are strong but income inequality remains high; the low price of less skilled labour helps boost spending power.
Cairo is one of the cities which has become markedly more affordable for those with dollar income. The Egyptian pound has fallen 55% against the US dollar since the second half of 2016 when the authorities removed the peg to the greenback. According to UBS Cairo is now the cheapest of the 77 cities they analyse.
London has become cheaper, dropping down cost of living rankings as a result of a weaker pound and lower rental costs. In 2015 rental costs in London were higher than in any other European city. Since then the average rent (for the sort of expatriate-type accommodation tracked in the EIU and UBS indices) has since declined by 15% and is now lower than in Paris. In the EIU’s league table of the cost of living in 133 cities, London is now 30th, its lowest ranking in two decades. London’s fall in the rankings now makes it cheaper than Hamburg, Dublin and Frankfurt.
Spending patterns vary with age and, so too, does the cost of living in different cities. UBS have compiled a cost index for ‘millennial must-haves’, which consist of a Netflix subscription, one kg of avocado, an iPhone, a notebook, a pair of jeans, a pair of trainers, a Big Mac and a cup of coffee. Interestingly one of the most expensive cities overall, Hong Kong, is one of the cheapest for this millennial lifestyle basket. Of the subset of 11 cities analysed by UBS, Buenos Aires is the most expensive at double the cost of Hong Kong. Despite the relative affordability of avocado in the Argentinian capital, an iPhone will set you back $2,243. The sky-high price is a result of import tariffs designed to stem the outflow of dollars from the country.
Cost of living indices are fascinating but they don’t paint the full picture. They assume spending is financed by dollar income. That may be true of tourists and some expats, but if you permanently live in a country your income is more likely to be determined locally and denominated in the national currency. It makes a big difference to the cost of living in Oslo, for instance, if you are working locally and earning Norwegian krona. Conversely for someone paid in Egyptian pounds, Cairo is a pretty expensive place to live.
The other snag with cost of living league tables is that they assume the consumption decisions of households are uniform across cities, regardless of prices. In reality consumers adjust spending in response to relative prices. So, confronted with the sky-high cost of, for instance, running a car in Singapore, most people opt to use the excellent public transport network. An expat living in a low cost city like Karachi might employ a housekeeper and a full-time nanny, services that would be ruinously expensive in high cost city like Copenhagen.
The point is that consumers flex spending to maximise their welfare. That means that what you spend your money on is heavily dependent on where you live.
Yet the main finding from these league tables is reassuringly obvious. By and large living in a nice city is expensive.