Our Opinion: 2018

Which global cities have the highest living costs?

UBS has just issued its annual report on the Worldwide Cost of Living which makes for some interesting reading. Singapore has retained its title as the world’s most expensive city for the fifth consecutive year in a top ten that is largely split between Asia and Europe. In the rest of Asia, Hong Kong and Sydney join Singapore and Seoul in the top ten.

Tel Aviv, which was ranked 34th just five years ago, is now the ninth most expensive city in the survey. Currency appreciation played a part in this rise, but Tel Aviv also has some specific costs that drive up prices, notably those of buying, insuring and maintaining a car, which push transport costs 79% above New York prices. Tel Aviv is also the second most expensive city in the survey in which to buy alcohol.

Within western Europe it is non-euro area cities that largely remain the most expensive. Zurich (2nd), Oslo (5th), Geneva (6th) and Copenhagen (8th) are among the ten priciest. The lone exception is Paris (2nd), which has featured among the top ten most expensive cities since 2003. Europe now accounts for three of the five most expensive cities and for one-half of the top ten. Asia accounts for a further four cities, while Tel Aviv is the sole Middle Eastern representative.

New York has moved four places down the ranking to 13th position owing to a weakening of the US dollar in 2017, which has also affected the position of other US cities.

Despite topping the ranking, Singapore still offers relative value in some categories, especially compared with its regional peers. For categories such as personal care, household goods and domestic help Singapore remains significantly cheaper than its peers, but it remains the most expensive place in the world to buy and run a car and the third-priciest destination in which to buy clothes. In terms of food and drink, the cost of living in Singapore is on a par with that of Shanghai in China. Seoul, Tokyo and Hong Kong are the three most expensive places in the world to buy staple goods.

With the dollar weakening against other currencies, no North American city ranks among the ten most expensive cities, although New York and Los Angeles remain highly ranked in 13th and 14th place respectively, compared with ninth and 11th position last years.

Despite a rallying euro in 2017, Paris is the only euro area city in the top ten. The French capital, which has risen from seventh position to second, remains structurally extremely expensive to live in, with only alcohol, transport and tobacco offering value for money compared with other European cities. The Danish capital, Copenhagen, which pegs its currency to the euro, also features in the ten priciest cities, largely owing to relatively high transport, recreation and personal care costs.

When looking at the most expensive cities by category, it is interesting to note that Asian cities tend to be the priciest locations for general grocery shopping. However, European cities tend to be priciest in the household, personal care, recreation and entertainment categories, with Zurich and Geneva the most expensive, perhaps reflecting a greater premium on discretionary spending.

Tashkent in Uzbekistan, which experienced the sharpest decline in the cost of living ranking in the past 12 months, fell by 35 places to 112th position. The reason for this drastic decline was an almost 50% depreciation in the value of the national currency, the som, after it was allowed to float freely in early September 2017. The impact of currency devaluation was also felt in Cairo, which has narrowly avoided joining the bottom ten at 121st place. The city fell by 22 places in the ranking as the Egyptian pound lost half its value after the Central Bank allowed it to float in November 2016.

In contrast, volatility in the Mexican peso, reflecting in part the renegotiations of the North American Free-Trade Agreement (NAFTA) as well as increasing inflation in the country, drove Mexico City 23 places up the ranks. In Chile, Santiago has moved up the ranking as increases in the price of copper, the country’s primary export, strengthened the Chilean peso. A stronger Russian rouble—partly driven by recovering global oil prices—also pushed Moscow and St Petersburg up the ranking by 12 and 14 places, respectively.

The cheapest cities in the world have seen some changes over the past 12 months. Asia is home to some of the world’s most expensive cities—but to many of the world’s cheapest cities too. Within Asia, the best value for money has traditionally been offered by South Asian cities, particularly those in India and Pakistan. To an extent this remains true, and Bangalore, Chennai, Karachi and New Delhi feature among the ten cheapest locations surveyed. India is tipped for rapid economic expansion, but in per-head terms wage and spending growth  remain low. Income inequality means that low wages are the norm, limiting household spending and creating many tiers of pricing as well as strong competition from a range of retail sources. This, combined with a cheap and plentiful supply of goods into cities from rural producers with short supply chains as well as government subsidies on some products, has kept prices down, especially by Western standards.

Nonetheless, although South Asian cities traditionally occupy positions among the ten cheapest, they are no longer the cheapest cities in the world. Last year that title was held by Kazakhstan’s business centre, Almaty, which fell in the ranking following a 50% devaluation of the national currency, the tenge, after it was allowed to float in August 2015. This year it is Syria’s capital, Damascus, which occupies that position, having fallen by 14 places in the past 12 months. The citizens of Damascus may not feel that the city is getting cheaper, with inflation averaging an estimated 28% in Syria during 2017. However, local price rises have not completely offset a near-consistent decline in the value of the Syrian pound since the onset of war in 2011.

Joining Damascus at the bottom is Venezuela’s capital, Caracas, which fell by 13 places to 132nd place amid currency devaluation. The Venezuelan government unified and devalued the official exchange rates in early 2018 in an attempt to reduce currency pressure, but amid hyperinflation, the currency remains hugely overvalued, as reflected in an extremely large black-market premium.

As Damascus and Caracas show, a growing number of locations are becoming cheaper because of the impact of political or economic disruption. Although the Indian subcontinent remains structurally cheap, instability is becoming an increasingly prominent factor in lowering the relative cost of living of a location. This means that there is a considerable element of risk in some of the world’s cheapest cities. Karachi, Algiers, Almaty and Lagos have faced well-documented economic, political, security and infrastructural challenges. Put simply, cheaper cities also tend to be less liveable.

There are other unknowns as well. The US president, Donald Trump, has caused some significant upheaval in trade agreements and international relations, which may push up prices for imports and exports around the world as treaties unravel or come under scrutiny. Meanwhile, measures adopted in China to address growing levels of private debt are still expected to prompt a slowdown in consumption and growth over the next two years. This could have consequences for the rest of the world, resulting in further staged renminbi devaluations that would affect the relative cost of living in Chinese cities.

Instability and conflict around the world could continue to fuel localised, shortage-driven inflation, which would have an impact on the cost of living in certain cities. Latin American cities have seen significant movements both up and down the ranking in recent years. Equally, exchange-rate volatility has meant that, while Asian cities have largely risen in cost-of-living terms, many urban centres in China and Australia have seen contrasting movements from year to year. It is also worth remembering that local inflation driven by instability is often counteracted by economic weakness and slumping exchange rates. As a result, cities that see the highest inflation will often see their cost of living fall compared with that of their global peers.

With emerging economies supplying much of the wage and demand growth, it seems likely that these locations will become relatively more expensive as economic growth and commodity prices recover. However, price convergence is very much a long-term trend, and in the short term, the capacity for economic shocks and currency swings can make a location very expensive or very cheap very quickly.

17thApril 2018