Increasingly unaffordable cities
Wednesday, 5 November 2008
Matt Woolsey
After achieving a flashy new investment grade rating in May, the Brazilian economy has continued to grow, even as other emerging markets like India and China have succumbed to a global economic slowdown.
The only drawback? Things there have become significantly more expensive, as the Brazilian real has outperformed the dollar, pound and euro, and the demand for housing, especially in the high end, has driven prices to new highs.
While the Brazilian cities of São Paulo and Rio de Janeiro are still more affordable than New York City, they join Rome and Moscow on the list of international cities shedding affordability at the fastest rates.
"It's mainly linked to the fact that the real has gained value," says Nathalie Constantin Metral, a research director at Mercer Consulting, an international human resources consulting group. As a currency gains strength, importing products becomes more expensive. "What really makes the difference is the exchange rate and the price of goods."
We compiled our list using data in Mercer's Worldwide Cost of Living Survey 2008, released today. Mercer surveyed 253 cities on six continents and used 200 criteria from housing and transportation to food, clothing and entertainment. Mercer assumed a lifestyle commensurate with an expatriate executive, so while living in Rio de Janeiro can be inexpensive in a favela, it's ever more expensive to live in the city's prime areas. Forbes.com looked at the cities where the price index went up the most over the last year.
Because cities are measured in relation to one another, and not in pure nominal terms, general price inflation isn't enough on its own to make one city more expensive than another. When inflation does play a role, it's in cities like Tehran, Iran, or Caracas, Venezuela, where runaway price inflation far outpaces the international trend. Inflation is up 26 per cent this year in Iran, and the central bank, at the behest of President Mahmoud Ahmadinejad, has printed enough cash since 2005 to increase the country's overall supply by 40 per cent.
While food prices around the world have soared, there are few places they've spiked faster than in Caracas, where, as a result of poorly managed state-run agriculture systems, core food prices have gone up by 19 per cent in the last year, according to the Central Bank of Venezuela. That easily outpaces price surges in Europe and the Americas, where food inflation was between 7 per cent and 9 per cent for the same time period.
Fortunately, the Venezuelan government offers fuel subsidies. While this may be a problem for the country's economic future, to the expatriate who doesn't have to worry about higher costs of transport being cooked into his food costs, this is a good deal.
Growing wealth also plays a role in higher living costs. Consider Poland and its capital, Warsaw. In July, the country saw its currency, the zloty, reach an all time high against the euro, and a 15-year high against the greenback. Combine that with 5 per cent annual growth and ongoing EU subsidies, and Warsaw becomes more expensive to outsiders due to currency and costlier to nationals as prices rise to match the newfound wealth.
Yet economic expansion and strengthening currency has its pitfalls. As cost of living soars and inflation creeps into the picture, governments are put in the difficult position of trying to further promote growth while simultaneously keeping price inflation low enough to allow consumers to spend.
The Australian government, for example, has increased interest rates 12 times consecutively since 2002 to stave off inflation and is cutting personal taxes so consumers have money to spend. This affects those in Melbourne and Perth, which rank No. 8 and No.10, respectively, for their accelerating costs of living. It's a precarious situation. Increase interest rates too quickly and you'll slow growth, but keep interest rates too low and you'll mute the spending power of the economy's growth by making money more expensive.
"The tax cuts over the past couple of years have been somewhat offset by the double whammy of sustained higher petrol prices and the marked increase in the cost of debt," says Matt Whitby, national director of Knight Frank Australia, an arm of the London-based financial research firm.
One major problem has been in the availability of housing. "Both state and federal governments need to seriously address the supply shortage in this country, not only as a necessity due to the growing population, but to put downward pressure on prices and rents and hence inflation," Whitby says.
While it's hard to take pity on the industrious Australians, Americans have to be at least a little pleased with a cost of living at home that's flattening relative the world. Of course that changes completely if they try to take their dollar abroad.
After achieving a flashy new investment grade rating in May, the Brazilian economy has continued to grow, even as other emerging markets like India and China have succumbed to a global economic slowdown.
The only drawback? Things there have become significantly more expensive, as the Brazilian real has outperformed the dollar, pound and euro, and the demand for housing, especially in the high end, has driven prices to new highs.
While the Brazilian cities of São Paulo and Rio de Janeiro are still more affordable than New York City, they join Rome and Moscow on the list of international cities shedding affordability at the fastest rates.
"It's mainly linked to the fact that the real has gained value," says Nathalie Constantin Metral, a research director at Mercer Consulting, an international human resources consulting group. As a currency gains strength, importing products becomes more expensive. "What really makes the difference is the exchange rate and the price of goods."
We compiled our list using data in Mercer's Worldwide Cost of Living Survey 2008, released today. Mercer surveyed 253 cities on six continents and used 200 criteria from housing and transportation to food, clothing and entertainment. Mercer assumed a lifestyle commensurate with an expatriate executive, so while living in Rio de Janeiro can be inexpensive in a favela, it's ever more expensive to live in the city's prime areas. Forbes.com looked at the cities where the price index went up the most over the last year.
Because cities are measured in relation to one another, and not in pure nominal terms, general price inflation isn't enough on its own to make one city more expensive than another. When inflation does play a role, it's in cities like Tehran, Iran, or Caracas, Venezuela, where runaway price inflation far outpaces the international trend. Inflation is up 26 per cent this year in Iran, and the central bank, at the behest of President Mahmoud Ahmadinejad, has printed enough cash since 2005 to increase the country's overall supply by 40 per cent.
While food prices around the world have soared, there are few places they've spiked faster than in Caracas, where, as a result of poorly managed state-run agriculture systems, core food prices have gone up by 19 per cent in the last year, according to the Central Bank of Venezuela. That easily outpaces price surges in Europe and the Americas, where food inflation was between 7 per cent and 9 per cent for the same time period.
Fortunately, the Venezuelan government offers fuel subsidies. While this may be a problem for the country's economic future, to the expatriate who doesn't have to worry about higher costs of transport being cooked into his food costs, this is a good deal.
Growing wealth also plays a role in higher living costs. Consider Poland and its capital, Warsaw. In July, the country saw its currency, the zloty, reach an all time high against the euro, and a 15-year high against the greenback. Combine that with 5 per cent annual growth and ongoing EU subsidies, and Warsaw becomes more expensive to outsiders due to currency and costlier to nationals as prices rise to match the newfound wealth.
Yet economic expansion and strengthening currency has its pitfalls. As cost of living soars and inflation creeps into the picture, governments are put in the difficult position of trying to further promote growth while simultaneously keeping price inflation low enough to allow consumers to spend.
The Australian government, for example, has increased interest rates 12 times consecutively since 2002 to stave off inflation and is cutting personal taxes so consumers have money to spend. This affects those in Melbourne and Perth, which rank No. 8 and No.10, respectively, for their accelerating costs of living. It's a precarious situation. Increase interest rates too quickly and you'll slow growth, but keep interest rates too low and you'll mute the spending power of the economy's growth by making money more expensive.
"The tax cuts over the past couple of years have been somewhat offset by the double whammy of sustained higher petrol prices and the marked increase in the cost of debt," says Matt Whitby, national director of Knight Frank Australia, an arm of the London-based financial research firm.
One major problem has been in the availability of housing. "Both state and federal governments need to seriously address the supply shortage in this country, not only as a necessity due to the growing population, but to put downward pressure on prices and rents and hence inflation," Whitby says.
While it's hard to take pity on the industrious Australians, Americans have to be at least a little pleased with a cost of living at home that's flattening relative the world. Of course that changes completely if they try to take their dollar abroad.