Expensive Cities

Tim Harford addresses the perennial cost-of-living question: how come Moscow always seems to come top? Or, as his reader puts it,

Just wanted to ask if there is an economic explanation for the fact that real estate in cities in third world countries like India is often more expensive than in cities in the US. (Except for New York,and a few cities in California.)

It's worth pointing out immediately that no Indian city has made it onto Mercer's cost of living list, which I think is the generally-accepted standard in such matters. (Then again, there are only two US cities on the list: New York, in 15th place globally, and LA, in 42nd place.)

But Harford's questioner has a point. Besides Moscow, in first place, the list is studded with emerging-market cities. Look at the list from 24th place on down: Douala, Amsterdam, Madrid, Shanghai, Kiev, Athens, Almaty, Barcelona, Bratislava, Dakar, Dubai, Abidjan, Glasgow, Lagos, Istanbul. These places might be expensive, but they're not necessarily pleasant or particularly desirable places to live, and they certainly aren't in the world's richest countries.

Now one good thing about blogging for the FT is that you get Martin Wolf on hand to answer your questions, which he does here very well:

My explanations would be: (1) there has been a large and sudden increase in the number of people being paid rich-country salaries in some cities (even though they are still a tiny minority of the population); (2) there is a truly tiny stock of housing that meets the standards of people being paid such salaries; and (3) planning and other controls (as well as limitations of the construction industry) make it difficult to build a great deal more such accommodation quickly.

This is all entirely true, and it's worth remembering that the list is drawn up by a multinational human-resources company, which specializes in placing executives in far-flung cities. We're not talking about the cost of living for the average inhabitant, here: we're talking about the cost of living for, say, a lawyer or a banker or an oilman who has to move to the city in question and who is used to a certain lifestyle. In a city with a tiny handful of good restaurants (by New York standards, say), those restaurants are going to be much more expensive than they would be in New York, where there's a lot more competition. And the same goes – in spades – for luxury apartments.

Let's say you're an American high-school student, and you're toying with the idea of attending university abroad, rather than in the US. In that case, you can take a Mercer report like this and throw it out the window. Is Moscow the most expensive city in the world to be a university student? Of course not. Neither would living in St Petersburg cost more than living in Paris or New York. (On the other hand, London really is very expensive, by such standards: the minimum cost of living there is much higher than it is almost anywhere else.)

But some things are true no matter where you are on the economic ladder, and one of those things is that the Americas, generally, are cheap. If you keep away from New York City, and certainly if you're happy in great cities like Toronto or Rio, then you'll be able to live much better, on any given budget, than you would be able to almost anywhere else. So using non-NYC US cities as a yardstick can be deceptive.