Nine reasons why London is so expensive

Tyler Cowen at Marginal Revolution asks a good question: Why is the UK so expensive?

A loyal MR reader, Erik Alberts, writes:

I've made several trips to the UK in the past few months in preparation and it amazes me how much more things cost there (in London) then here in California. What I'm trying to understand is why.  I realize that some things like gasoline cost more in the UK due to taxes.  But for other things, it appears that prices in the UK are 40 to 50% higher.  How would you explain this?

...I realize that higher taxes and higher labor costs may be factors (although at my company UK labor is cheaper than it is in California), but I find it difficult to believe that this would explain a 50% difference.  Could this be a sign of currency imbalance like the big mac index, a supply and demand issue, or are UK consumers simply used to paying more?

I have wondered the same about Switzerland.  The standard explanation is that expensive countries are extremely productive with their tradables (North Sea oil and London finance?).  That appreciates their exchange rates and renders non-tradables quite dear.  This is the flip side of cheap barbers and prostitutes in Thailand.  But are the Brits really so productive?  If so, why can't they get both hot and cold water coming out of the same tap?  And aren't some of the expensive goods tradables rather than non-tradables?

One factor for sure is that American retailing is the most efficient and most productive in the world.  Perhaps the Brits are especially inept in this regard.

A further factor may be that foreigners, even those who are considering moving, sample British prices in biased fashion.  We see lots of hotel rooms, cab rides, and restaurants.  Fish and chips is still pretty cheap outside of London.  As for Marmite I could not say, but that is exactly the point.  Your preferred consumption basket will always look expensive in another country; just try getting Ocean Spray grapefruit juice in Western Samoa.

Your thoughts? 

Erik Alberts mentions two obvious candidates: higher taxes and labour costs.

1. Higher wages: More expensive living costs and a minimum wage well above the United States is reflected in higher wages. (Consolation: you don't have to tip).

2. High sales tax: VAT is 17.5%, well above what you would pay in most US states. It's in the purchase price, so you may not even know it's there.

Tyler mentions three more:

3. Strong sterling: The pound has long been quite buoyant, much to the annoyance of UK manufacturers. But it is particularly perky at the moment, reflecting both a quite robust British economy and an ailing greenback. (But the Euro isn't cheap for American tourists either. If you want your dollars to go further, try Asian countries pegged to the US dollar like China and Hong Kong). 

4. Retail competition. I don't think British retailers are "inept", as Tyler claims. But supermarkets account for a smaller market share, because of cultural preference and planning restrictions. And a country with one-third one-fifth the population obviously won't have the same economies of scale as in the US. So yes, retail margins are often higher, and so are prices.

5. Biased consumption bundle/information asymmetry.  Tourists do indeed "sample British prices in biased fashion". But their experience of feeling 'ripped off' also reflects information asymmetry. Tourists often catch black cabs or the Underground (rather than buses, which are half the price) because they don't know their way around. They rely on well-known chains because they don't realise the shop around the corner sells coffee or sandwiches for half the price of Starbuck's. They pay far too much for mediocre restaurant meals. Local knowledge saves money and time.

All of these are true. But while high wages, high sales taxes and  a strong currency all matter, the biggest single factor is almost certainly property prices.

6. Property prices: Tourists visiting London tend to cluster around Zone 1 in central London, where property prices are higher than Manhattan (thanks to height limits, heritage listing and other restrictions). The result? Very expensive hotels (by US standards), and retailers paying eye-bleeding rentals - which they inevitably pass onto you and I.

Three other factors are also worth mentioning:

7. Transport. In Britain it invariably takes longer or costs more to get to your destination than it should. Britain has fewer roads and trains than the rest of Europe; the result can be road congestion and exorbitant train fares. Many Britons find it easier and cheaper to holiday abroad than in their own country. Moaning about the transport system is a national past time. Incredibly, some now look back on the once-despised British Rail with nostalgia.

8. Weak consumerism. British consumers are used to being mistreated, lied to and cheated (think Basil Fawlty). What surprises many American visitors is how seldom locals make a fuss about bad service or poor quality goods. Consumer law and advocacy is weaker than in the US - fraud is widespread, enforcement can be patchy, and class actions are not allowed. Financial fraud is called 'mis-selling', as if it were just an accident! We have no Ralph Naders.

9. Inequality. London has more of the world's super-rich than anywhere else on the planet, and it shows. Luxury goods and services abound. The place is full of chauffeurs waiting around, 'ladies who lunch', Arabs spending up big, and City boys who think nothing of paying US$200 for a meal and drinks. Many Londoners are not price conscious; they're willing to spend a lot for positional goods. That affects prices. Sadly, it also means paying a lot won't guarantee good quality.

My advice to visitors to London? First, take the time to do some research. For hotels, TripAdvisor is generally reliable - you may not find the best hotel in London, but you will certainly avoid some of the worst. As for food, either ask a local, or try Square Meal or London Eating. And be on the alert for thieves and con artists.

Enjoy your stay!

Comments

[James]

That's a really interesting analysis, you've just listed most of the things that piss me off about my country, particularly London.

[James]

i believe a few years ago ( i dont know about now) cars in the UK were much more expensive than on mainland Europe and it was because of price fixing.
No one is as efficent as USA when it comes to retail.
If you go to say Karachi, Pakistan the prices for goods are rising rapidly because of this "new rich" that is emerging and pushing everyone else out.
I think London is similar these few rich people are pushing prices way up (retailers know they can make massive profit from them and ignore the bottom of the market)
That is my guess.

[RareBook]

I often go into London for meetings. When we are done I wonder along the South bank. Some places are expensive however I have found a few restaurants (near Tower Bridge) that are comparable in price to my home town of Faversham, Kent.

[Richard Lander]

Number 9 is probably the most important. Think of any upscale restaurant in or around the City. They can fill the place whether a main course costs £25 or £35 because nobody is digging into their own pocket. Elsewhere, there is so much wealth that when private school fees, football tickets etc are raised by inflation busting amounts each year, it is all water off a duck's back to anyone eranign in excess of £250k a year. There are so many of these in London that the supply-demand equation for many luxury goods has simply broken down to the detriment of the rest of us.

[Brian]

UK does not have 1/3rd of the population of USA.

UK population = 60 million
USA population = 300 million

[Lord]

So many of these feed on each other. Poorer transport leads to higher land values, which leads to higher wages, greater inequality, and less effective retail competition, which in turn leads to higher land values.

[On Anon]

It's not the quality people are paying for when they pay 30 pounds for a meal. It's to avoid the plebes who can't afford the place.

[Matthew]

Be careful here. No.5 might play a role as we're talking about international businemssman, but bothof the two best-knownn cost of living surveys, the EIU and Mercer Consulting, put London at about 10-20% more expensive than New York.

That's not a small amount, but it's not massive. I think some people are comparing London to Ohio or something.

[H]

I moved from one affluent city, Hong Kong to the most affluent city in the world ,London and I can tell you that the American take on London is wrong. As correctly mentioned by a previous blogger, London has more super rich residents than anywhere on the planet and a level of sophistication that Americans could only dream of. London, to use an American saying is not worth looking up on a knickle and dime budget. For burgers head to the states. They're served with a smile.

Firstly, on the issue of expense, there are very simple economic fundamentals as to why London and the UK is so expensive. Supply of top and low end property exceeds demand. Square feet have to be paid for at the retail end by charging an excess.This excess is paid by the consumer. The standards of service in the UK are also not as high as the states in what I will refer to as "the burger joint end" as the minimum wage is double that in the states. Coupled with low unemployment this means that people don't have to prostitute their personalities just for tips. In the states, a bar tenders over attentiveness in search of tips would be deemed pathetic in London where the same position in the UK provides him/her triple the salary. Personality prostitution is not the done thing in the UK.

When you spend at the low end in the States, you get fantastic service and good quality. But we are talking about burger joints and Gap. London is a different planet when it comes to consumer goods. We are talking about (fact) more high end retail stores than New York and LA put together and a level of service that doesn't exist in the States at the same level. Essentially, America caters very well to the Low end, ie: the mass population, London (not the whole of the UK) caters to people at the top end. Both countries have strengths at the opposite end of the service ladder. The service at the top end in London exceeds even my home town of Hong Kong. But similer to the states, the service at the low end in Hong Kong is amazing. So the point is this, if you have cash and don't want to start a blog on the high cost of the uk, live in the states, if you are part of the super rich, live in London.

[H]

please note, i meant to write that supply exceeds demand with regards property.

[Paul Meyer, Editor - Rip-Off Britain]

I applaud Professor Cowen for his Blog, but suggest both he and the contributors head for my website, Rip-Off Britain: www.rip-off.co.uk

Although I don't claim to have ALL the answers as to why the United Kingdom is so expensive, as compared with many other countries such as the USA, the outrageous tax on fuel (gasoline), other taxes such as high import duties, VAT (sales tax) and property taxes, uncontrolled commercial rents, high property prices and gross profiteering by multi-national businesses (who deem us as ‘Treasure Island’), has much to do with the regime of high prices - which I might add has been this way for the past 50 years!

Has anyone ever wondered why British banks are the most profitable in the World? Recently five of Britain's biggest banks unveiled combined profits of more than £19 billion!

Of course, the UK is not alone. Many other European countries including The Netherlands, Ireland, Denmark, Italy, Austria, Sweden & Norway also suffer from high prices.

Brits DO complain about high prices, but because we live on a small island can do little about it. Even if one takes off to other European countries to buy 'cheaper' goods, UK Customs restrict certain items one can bring back to the UK without paying high import duties - regardless cross-border shopping is basically unrestricted within the European Union!

The situation can only get worse. With a previous Government estimate of 15,000 migrants from the new EU entrant counties - which NOW is in fact 600,000 - and with the entry of Romania & Bulgaria in 2007, the strain on local services, housing, etc., can only increase prices and unemployment.

Perhaps the only viable solution is to join the 350,000 Brits who are leaving the UK each year!

Keep the debate going.

Regards,

Paul Meyer
Editor, Rip-Off Britain
www.rip-off.co.uk

[Anthony Ravasel]

The principal underlying reasons for the ridiculous cost of living in the UK are historic. The British people are essentially spineless and have long accepted being poorly treated and dictated to. Remember after they cut off the head of King Charles, they still wanted a king to tell them what to do - they even trapsed around Europe to "import" a king who would have them.

The British, who are regarded as subjects and not citizens, do not really know how to stand up for themselves and how to reject poor treatment. Over time, this has been taken advantage of and reinforced by successive kings & queens and then politicans and now also big business.

Considering the amount of money that is being taken (stolen) from us each minute of each day, we are not living in paradise - far from it people. The UK is still one fo the dirtiest, unhealthy and low morality place in Europe and yet wealth abounds in the hands of the privileged few.

Don't come and live in the UK - it will suck the life out of you.

[Ryan]

there are fewer English Pounds in circulation than US dollars. Supply and demand. the u.s. has been creating money like crazy since the 70's. The brits don't have the overhead(wars and empires are expensive) we do and don't need to inflate as much.

[Nic Deses]

That explains why London is more expensive (or as expensive) than NYC, but why is it more expensive than other US cities or capitals like Paris, Rome, Brussels or Amsterdam... and neither does it explain why for instance Canterbury is expensive too (I had to live there a few months and it is more expensive than Brussels)

Wages and taxes in continental Europe are said to be rather higher than in the UK (which is always given as an example for a low tax and low wagecost country by European liberals, the example to follow, so they say!)
The only explanations left are higher benefitmargins and wild capitalism...Or are there others ?

[Nic Deses]

Please note that I live in Brussels and spend a lot of time in France and Italy during the last years: any idea concerning aholiday or vacation in London stops in his tracks when I see prices in the UK. I'm just back from three weeks in Rome: An mediumsized appartment near the Spanish steps was cheaper than a small studio in London or Canterbury.

[CB]

London is shit hole and the people a rude, snobby, arrogant, sleezy and shiesters.

[nic deses]

A small follow up to what I wrote above (sep 25 2007) I'm just back from Berlin: once again, London was to expensive to consider:
A modern, clean, furnished 2-bedroom apartment with television, stereo, dishwasher at a few hundred meters from Brandenburger Gate ,Parizer Platz,Potsdamer Platz Gendarmen Platz and Unter den Linden : less than 80€/day...Where could I find that in Central London?

[sam neil]

My advice would be to avoid coming to England and london.
There are better places in the world where your money is well spent.
And moreover you would get bored in England.
Go elsewhere and have a fun time.

[Nic Deses]

Another follow up to what I wrote above (sep 25 2007) I'm back from 10 days in charming Copenhague (named "most expensive city" in Scandinavia, its very "Amsterdam-like"): once again, London was too expensive to consider...
Next one, Barcelona, again London was too...

I'd like to go (I only went once to London and there's a lot I didn't visit then, of course) but everytime a less expensive destination pops up.

DO SOMETHING ABOUT IT!

[Norm]

As usual,the truth never seems to make it to print.Gov't taxes(greed)and profit(greed).Oh wait,guess it's a one-fold.Companys purchase goods for resale in U.S. Dollars and sell them for UK Pounds.Usually at twice the price(if it cost 200 dollars they will charge 200 pound and profit in the exchange rate difference).And the fact that people are apathetic about doing anything about it. The Gov't says the pound is worth more than the dollar so,it is.But brother let me tell you this:If the dollar buys more>It's worth more!

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those are true good reasons why!!!
actually London is very expensive, but is also very pretty and is a beautiful country to visit if you go to Europe!

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London is beautiful, I visit this country one year ago, and I can tell is amazing, if you have the chance, you should go!
Cheryl

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I have never been in London, but i wish some day my children and I can go!
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london is a pretty expensive city to travel, I don't like it.

[alex]

London is ok to visit for a 3-4 days, that`s it. Brits emigrating hmm I feel they should face very stringent checks as they might bring their grumpiness with them :))) And stop blaming Government and foreigners, cheer up and fix your mess!

[Lisa]

It's like I honestly can't take it anymore here. I'm near to break down. The people are so rude, no one is nice or talks to each other kindly, people fight and shove to get on the tube at rush hour, everything is so expensive, the weather is harrowing, the postal system doesn't work, children carry knives and sometimes stab / shoot each other.

I am trying to buy a house in Australia. There is NO quality of life here. I spend most of my weekends crying.

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[Kevin]

If you are visiting the UK, try visiting Manchester as an alternative to London. It is a far more friendly city, cheaper to visit and still steeped in culture. There is quite a lot of wealth in Manchester also (and similar to London there's a lot of poverty too) - but the city centre particularly is well set up for tourists, ie. cheaper accomodation options, lots of great restaurants where you can eat for the equivilent of $30 or less per person for dinner including wine etc, lots of theatres, tours etc. I was astonsished that the first computer, first train, industrial revolution etc all started in Manchester.

There seem to be less conmen out to get tourists and it is easier to travel around than London and also great bar and club scene in the evenings. I went to both London and Manchester and far preferred the city of Manchester - not to mention they have the worlds greatest soccer team there, and their stadium Old Trafford is fascinating. I'd suggest going there on a match day (usually Saturdays) and soaking up the atmosphere outside the stadium, possibly even get a ticket in advance if you can.

London is OK but after a couple of days I had seen everything I wanted to see there and didn't like the vibe, but I spent almost a month in Manchester and loved every minute.

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Even though in London it is expensive, still there are so many things you could enjoy here

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[Nic Deses]

Twice more...
2009 London too expensive, thus we went to Berlin,Copenhague, Barcelona and Tarragona

2010 We considered London again: too expensive.
It will be Vienna and Bratislava , maybe Budapest too.
Still looking for a third destination.

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this city in last summer.....

.....Alex

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London. I would like to visit this city.

....Alex

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Well the reasons are quite correct and really lot of think over it.
London is a great region where the investment makes sure profit.And thy considering its too expensive.

[An inhabitant of London (planning my escape)]

London is expensive, and palatable only for the rich (or at least earning a 6-figure salary... in sterling). There are so many nicer European cities to visit.

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