Thursday, September 16, 2010

Where can I earn the most and spend the least?

On Wednesday, UBS released its 2010 updated report on Prices and Earnings, the bank's look at consumers' purchasing power in 73 of the world's major cities. The report is normally issued every three years, last in 2009, but demand for the product led UBS to publish a 2010 update. For those of you who aren't aware of UBS, they are a 150 year old Swiss-based global financial services company with offices in 50 countries around the world. They are the world's second largest private wealth management company and the second largest bank in Europe.

Wednesday's report compares wages and prices for a representative sampling of cities throughout the world. Prices were surveyed for 122 different goods and services and included 112 questions about working hours, payroll deductions and wages for 15 different occupations. The basket of goods selected was weighted so that the prices added up to the monthly consumption of an average European family of three. Price levels were set in relation to New York City which was assigned a value of 100.

Here's what the 2010 report found from most expensive to least expensive for the top 10 cities in the world. The first value shows prices excluding rent and the second shows prices including rent:

City Excl. Rent Incl. Rent

1.) Oslo 120.4 94.3
2.) Zurich 114.1 89.1
3.) Geneva 112.4 90.0
4.) Tokyo 105.7 88.5
5.) Copenhagen 103.6 78.2
6.) New York 100.0 100.0
7.) Stockholm 97.1 73.1
8.) Toronto 95.2 76.1
9.) Montreal 92.0 71.9
10.) London 91.3 75.5

Let's take a quick look at a few others. Sydney, Australia comes in 12th place with values of 89.9 and 74.4, surprisingly Dubai comes in 16th place with values of 88.0 and 81.2, Los Angeles comes in 17th place with values of 87.7 and 72.4, Auckland comes in 26th place with values of 82.1 and 65.3 and Chicago comes in 27th place with values of 81.8 and 71.9. The least expensive city to live in out of the 73 surveyed is Mumbai with values of 37.5 and 30.3.

As far as wages go, the highest wages are in Europe. Again, with New York City set as the standard at a value of 100, here are the top 10 cities with the highest wage levels. The first column shows gross salary, the second column shows net salary after deductions (net may appear higher because it is normalized to New York City net):

City Gross Wage Net Wage

1.) Zurich 121.8 126.0
2.) Copenhagen 118.2 88.0
3.) Geneva 117.3 113.1
4.) Oslo 102.1 91.5
5.) New York 100.0 100.0
6.) Sydney 93.1 98.6
7.) Los Angeles 90.9 91.9
8.) Stockholm 82.4 78.6
9.) Munich 82.2 72.3
10.) Luxembourg 80.2 90.6

Here are a few randomly chosen cities and their gross and net wage values. Chicago comes in 11th place with 80.1 and 78.8, Miami comes in 12th place with 79.2 and 81.9, Toronto comes in 13th place with 78.9 and 81.6 and Montreal comes in 16th place with 77.7 and 81.8. Last on the list is Mumbai in 73rd place with values of 6.3 and 7.6.

Yes, I know, the numbers get boring after awhile. I'd like to refer back to a chart of values that UBS included in its 2009 report; these are real world numbers that we can all relate to and I thought it was a pretty interesting way of looking at income levels and purchasing power.

The wise people at UBS took two uniform products that are available everywhere in the world and then calculated how long people would have to work to purchase those products. To normalize the data, they took the price of the product divided by the weighted net hourly wage (after deductions) in fourteen professions. The products purchased were a Big Mac and an 8 GB iPod nano. Here is a list of a few cities in no particular order with the number of minutes of work needed to earn enough to purchase a Big Mac followed by the number of hours of work needed to buy the coveted iPod:

City Big Mac (mins) iPod (hours)

London 13 11.0
Frankfurt 15 13.5
London 13 11.0
Los Angeles 13 9.5
New York 14 9.0
Osl0 21 10.5
Tokyo 12 12.0
Toronto 12 10.5
Nairobi 158 160.0
Mumbai 61 177.0
Dubai 18 20.0

So, in other words, what the study tells us is that while Mumbai might be the cheapest overall place to live out of the 73 cities surveyed, you have to work a lot of hours to buy that iPod nano. If you live in Nairobi and want a Big Mac, you'll be working 2 hours and 38 minutes for the privilege. Now that's economics anyone can understand!

My only complaint about the reports are that all price information is normalized to a reference currency; the U.S. dollar which makes data subject to fluctuations in exchange rates and can penalize countries whose currency has appreciated markedly against the U.S. dollar from year to year. In the 2009 reports, the roughly 30 percent appreciation of the New Zealand and Australian dollars against the U.S. dollar caused both countries to climb upwards in the ratings to the more expensive cities.

Another comment for Canadian readers would be the noticeable absence of Vancouver from the study. With Vancouver having, by far, the highest real estate prices in Canada (and, in fact, among 6 nations in the Demographia study), my suspicion is that the city of Vancouver would rank far above both Toronto and Montreal and many other cities in the world as one of the most expensive places to live in if purchasing a house were part of the calculation.

I will be taking a further look at the 2009 report since it has more detailed information on rents, hotel room prices and other items that are of interest to most of us.

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