Study Doesn't Prove Aussie Cost Of Living Is High

Most Australian news outlets ran stories yesterday and today claiming a new study shows that costs of living in our capital cities are amongst the highest in the world. Lamentably, virtually all of them fundamentally misinterpreted the research.

Picture by Brendon Thorne/Getty Images

This week, the Economist Intelligence Unit (EIU) released its annual Worldwide Cost of Living study. That study aims to compare the cost of living in various cities, but (and this is the important bit) it does so from the perspective of global companies who have to compensate their executives for the cost of living if it asks them to work overseas. It's a tool for HR executives who have to send someone from Stockholm to Sydney, but you wouldn't know that from the way most local outlets reported it.

A quick search reveals stories in the Australian, Sydney Morning Herald, Herald Sun and numerous others covering the report. Every single one leads with the notion that the EIU confirms that "Australian cities rank among the world's 20 most expensive places to live", as AAP put it. That might be true for people being paid in US dollars, but the study says nothing about Australians employed in Australia and paid Australian dollars, which is most of us.

Blogger Matt Cowgill debunks that entire line of argument very thoroughly in a post on his We Are All Dead blog, and the whole thing is worth reading. The simple point is that a study designed to assess the cost of living for someone not residing in their home country, and calculated using the same currency (the US dollar) as a base, will not tell us anything about costs for most Australians. As Cowgill explains:

Although the study is perfectly well designed for its intended purpose, it tells us very little about the cost of living for people who live and work in Australia and are paid in Australian dollars. The EIU is quite clear about this – the first subheading of the report is “Currency Swings Move Global Players”. It clearly states that its measure of the relative cost of living in various cities is more affected by changes in exchange rates than changes in domestic prices.

The report itself emphasises how it is global currency movements, not expenses in those countries, that has placed Australian cities in this particular list:

Local inflation in mature markets always has far less influence on the relative cost of living than the currency movements of the countries in question. This also explains the recent presence of Australian cities like Sydney and Melbourne in the ten most expensive locations as last year saw the Australian dollar pass parity with the US dollar from holding half that value a decade ago.

The strong dollar will have an effect on prices for us, but this study does not measure that impact in any direct way that relates to Australian wage earners. Using it for a news story as evidence that life is more expensive for Australians says something about the organisation reporting it, but virtually nothing about actual costs. As we like to point out around here, statistics are meaningless if you don't understand what they are measuring.

The cost of living – if the facts aren’t sensational enough, just add a twist [We Are All Dead]


Comments

    Regardless of the interpretation, inflation in Australia in the last 10 years (at least) has not in anyway matched the much slower increase in average salary rises. This has especially been seen in grocery prices and house prices. For the later, house prices have been over inflated over the years not because Australian's have been willing and able to pay higher prices, it is because foreign investors, who bring in stronger currencies, have been willing to pay more to secure their investment. Now that it is expensive to invest here due to the strength of our dollar, we have seen a decrease in foreign property investment, hurting the property market. Because of the high price of housing, a lot more people are turning to rent rather than owning their own home, further hurting the property market. However, because home owners have paid a high price for their home, they are unwilling to drop their price too low even in the slump.

    I could go on and on for pages and pages, but I can guarantee what the papers are reporting is correct, even if this particular report might have been misinterpreted.

      So it's OK to "misinterpret" a particular report as long as it agrees with what you assure us is "true"? Well, I really hope you work in a journalism school and are passing along those ideas. Much better than reporting on reality, ie finding a report that is both honest and shows the point you want to make.

      Actually a cursory glance at CPI (ABS. Cat. No. 6401.0) and Wage Price Index (ABS. Cat. No. 6345.0) would prove you wrong.

      CPI has grown by around 32% over the last ten years while WPI has grown by 44%.

    Agree completely. The Australian media is treating us like complete idiots by publishing that story under false headlines. Journalism is often about nothing more than click through rates.

    I think it is you guys who miss the point. A standard currency is a useful comparitor when you are comparing international cities. Were the survey to be done in Aust $ then the result would have been the same. Aust consumables are expensive when compared to Europe or the US particularly.

      "Were the survey to be done in Aust $ then the result would have been the same." No, that's just wrong. The single currency was used because companies operating in multiple countries ultimately need a basis for comparison. To measure the cost of living for locals, you'd need to stay in the host currency and compare it to typical incomes, neither of which happened here. As the quote emphasises, it was the exchange rate differences that overwhelmingly affected the figures, not domestic price changes. It may be that the cost of living has risen, but this set of data can't be used to demonstrate that.

      I agree with this statement. One of the downsides to internet journalism is an even worse desire to create sensationistic headlines. Before the internet newspapers really only had one headline that to be strong, outstanding and important. Now, every headline, under every genre of news is screaming for your attention, and ad dollars now focus on clicks rather than straight up purchases. Very very dangerous.

    You know, there's a reason the US can spend so much money on their military and coastguard etc. they have a population of over three hundred million! Similarly with Britain, France et al, so their collective taxes make a very large sum of money, enabling them to have a lower cost of living as well. Compare that to Australia and even poor old NZ and our cost of living 'HAS' to be higher. It's just common sense. Just look at the cost of living for any country that has a small population and they all have a high cost of living.

      As far as I can see, tax wasn't factored into the EIU report at all -- which makes sense, since employees relocated overseas aren't in a normal tax situation. So again, this might well be a factor, but it isn't a factor addressed by this data.

        Study Doesn’t Prove Aussie Cost Of Living Is High

        The headline paints a broad stroke though! the fact is that Australia is indeed an expensive place to live and until the population is large enough to negate that or our system of Governance changes, that won't change. No belligerence intended, I know you didn't write the story. :)

          ...you are correct only if you ignore the first three words of the headline.

            Erm,.. What now?
            The point being made is that Australia does indeed have a high cost of living. Due to the fact that we are one of the highest taxed countries in the world. You can't remove tax from the equation!

              Indeed you can't for general purposes -- but the EIU report does.

              As the post makes clear, there might well be an argument that the cost of living in Australia is high (due to tax or distance or inflation or any other factor), but the EIU report does not provide any evidence for drawing that conclusion. As such, newspaper reports saying "Here's further proof of how expensive life is" are bogus, because there's no such proof available in the data they are using.

              By the same token, people arguing that we're highly taxed or have seen costs increase massively out of proportion to salaries would be more convincing with specific numbers, not vague generalisations.

              Sigh, Antipodean, you should work for the major media who apparently aren't able to do even basic background checks.

              Here is some information for you to challenge your assertion that "we are one of the highest taxed countries in the world".

              http://comparativetaxation.treasury.gov.au/content/report/html/05_Chapter_3.asp

              Sigh. That whole "we're so highly taxed" line is like the oldest mistruth in the book. Australia's always been relatively low in terms of total tax take compared to the rest of the comparable world. The argument that we have an extremely high tax base can only be sustained through selective choice of comparison countries.. like Singapore.

                Sigh, really!
                A countries tax burden, has to be relative to it's population, hence the US has a relatively low tax burden, or at least if it worked properly, it would. Australia, due to it's much smaller population has to have a higher tax burden. You can quote all the graphs and equations you want. Our cost of living has to be reflected in that!

                  The tax burden figures Jason quoted are calculated relative to GDP, which means country size is factored in. What's being quoted are numbers, not "graphs and equations", and so far you've failed to produce any to support your case re tax. (And none of this changes the point that the EIU data is not relevant to Australians in Australia!)

                  Yeah, it does seem counter intuitive, but I've found at least one site that is not produced by Australia that shows that we are on the lower end of the tax burden! Seems we are a lucky country after all :)
                  http://www.nationmaster.com/graph/tax_tot_tax_as_of_gdp-taxation-total-as-of-gdp

                  I understand your point, and your argument makes sense - but the facts don't back you up. If you still don't believe that, then see http://en.wikipedia.org/wiki/Tax_rates_around_the_world (and note that Australian numbers are from 2005, and we've had significant tax cuts since then)

                  The thing you are missing that one of the biggest costs to the tax system (health systems) increases directly with the size of the population, so having a large population doesn't really amortorize that cost.

                  Even worse, an ageing population disproportionality increases the tax burden of health compared to the population size.

                  Australia has an ageing population, BUT (thanks mostly to immigration) we aren't nearly as badly off in that regard as many European nations.

                  (Obviously there is more to it that this - for example rapid economic growth in Australia allows the tax burden to be shared easier, and our tax system is much more progressive than in the US, which raises more money too. My point is that (a) we really are taxed less than most places and (b) the reasons for this are complex, and population size can't explain it on its own)

    Seems a lot of people are missing the point entirely. This article isn't saying the cost of living is high (or low for that matter) here. It is saying that the report that was widely covered in the press doesn't prove this from a local perspective. It is saying that if a US firm sent an employee to all these different cities to live with nothing but US dollars, then who would spend the most on a day-to-day basis. Clearly the worth if the US dollar in that country compared to the local currency affects the outcome.

    If it was just down to currency fluctuations then Canadian cities would top the list not Australian cities. Australia is a large remote country with widely spaced cities. Thus transport is a big problem. As transport costs go up (and they will) the costs in Australia will go up. Canada is not the same because it is a thin line spread along the USA border with deep integration of its transport links.

    On the question of the USA - it is living so far beyond its means (tax vs. govt. spending) that either taxes will soar or services will collapse. Neither is a good scenario. Better to live in Oz than the USA.

      > If it was just down to currency fluctuations then Canadian cities would top the list not Australian cities.

      Actually Canadian cities are near the top. But that is because their currency has appreciated too.

      > Thus transport is a big problem. As transport costs go up (and they will) the costs in Australia will go up.

      Actually, the strong dollar has protected us against transport cost increased somewhat. If the dollar hadn't appreciated then petrol would cost a lot more than it currently does.

    The problem is everyone it trying to treat this data as an affordability index (the relationship between income and cost) when it is solely one side of the P&L. The study does prove that Australia has a high cost of living but that is of little use without data on the income earnt to pay for this. In the same manner that Australian cities cost of living has soared as a result of FX, so have our incomes when converted to USD (the base currency).

    Thank you for pointing to this blog post. @MattCowgill is an informed and interesting fellow. Very happy to see Angus highlight the article.

    If you agree or disagree with what the report says, I personally can say that the cost of living in Australia is extremely expensive. And that is not based on a report or nor the media, It's real day to day living. I was born and raised in the U.S.A., now living in Australia. In retrospect the wages are higher here but if you have a decent income or a really great one in the states you come out ten fold.

      And there we have the other great derailer of rational argument -- the notion that one individual experience can disprove any amount of broader evidence. (To reiterate: there might well be data that demonstrates that Australia has a high cost of living. But the EIU data doesn't do that, and nor does the experience of one person.)

        In respect to the authors statement it seems like a david and goliath story. One's individual experiences compared to the universal data, don't compare. Exchange rate, wages, & statistics aside it doesn't take a genius to figure out that if you make good money in the states, it goes further for you. Call me one individual if you want, but wake up get a passport and start traveling to see things for yourself.

          I think the key indicator here is "make good money". I've lived and worked in the US and the costs for many things are generally lower - of course the US has certain advantages in the volume of the market (330 million) and that it is far closer to other countries and is a manufacturing hub (though not like it used to be). Also - those on the bottom make next to nothing - which is not true here. Healthcare is normally provided by the employer and depending on the plan may not provide that much. Losing your job often means losing your health benefits as well. The inequality in the US is far higher too.

          If you want to be selective about the prices of things - lets go for things that people are more likely to need (as opposed to want).

          Cost of a typical hospital stay from WHO data

          Australia - 229 AUD per day
          USA - 1091 USD per day

          http://www.who.int/choice/country/usa/cost/en/

          In Australia - for most this would be covered by our health system - not true in the US.

          Australia has far fewer of the super rich - but it doesn't have the same degree of poverty either.

    Interesting discussion happening in the comments.

    Not only does the EIU data NOT demonstrate that Australia has a high cost of living - it isn't designed to do so.

    Obviously, Australia, Brazil, Norway, Switzerland, and Canada have all seen their currencies rise in the last decade (and particularly in the last 3 years as the other economies (notably: the UK, EC, the USA) have raced to devalue their currencies.

    The question here is a comparative one - has Australia risen faster and further than other similar high trading currencies? - if yes, what other factors beyond currency is doing this. Currency maybe 50% of the problem but it is not the whole story.

    Here is an example:

    Mercedes Benz C250 Sedan (Avantgarde)
    Base Price in Australia $67,900 approx.
    Base price in USA $36,310 approx.

    Housing Bubble:
    When compared to median annual income, Australian house prices are the highest in the world.

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