Strategy

Survey distorts cost of capitals

Why Toronto and Montreal don't belong among world's 10 most expensive cities.

Grousing about the extortionate price of a pint of lager or a calfskin handbag in European capitals is something of a national sport for Canadian travellers. So it seemed incongruous to many when UBS, a Swiss bank, ranked Toronto and Montreal among the world’s most expensive cities — more so than London or Paris. Every three years, UBS publishes a study comparing the costs of goods and services in megalopolises around the world. Last year’s edition ranked Toronto and Montreal outside the Top 30. But in a recent update, they jumped to eighth and ninth, respectively, not far from New York.

UBS’s study is aimed at western Europeans; accordingly it monitors prices of 122 goods and services that reflect their consumption habits. More significantly, prices were converted into euros before comparisons were made. That explains the eye-catching result. Between UBS’s 2009 and 2010 studies, the average value of the Canadian dollar shot up nearly 27% against the euro. In that sense, living in Canada is suddenly far more costly for Europeans paid in euros — even if Toronto’s Bloor Street still seems a ghetto compared to the Champs-Élysées. And once apartment rental costs are factored in, Toronto and Montreal plummet in the ranking.

Louis Theriault, director of the Conference Board of Canada’s International Trade and Investment Centre, cautions about reading too much into UBS’s list. In particular, he was surprised UBS emphasized market exchange rates. “What’s more meaningful is the purchasing power,” he says. In its simplest form, purchasing-power parity considers how much identical goods — such as a Big Mac or Starbuck’s coffee — cost in national currencies. This is a far less volatile way of doing things than using exchange rates: for example, the price of a hamburger doesn’t jump 27% simply because of currency fluctuations. “I wouldn’t conclude because of this study that Montreal and Toronto are all of a sudden among the most expensive cities in the world,” he adds.

Other firms conduct cost-of-living studies, among them the Economist Intelligence Unit, ECA International, Mercer and PriceRunner International. They’re aimed at multinational companies seeking to determine salaries and allowances for expatriate workers, but methodologies vary widely. ECA’s latest list, published this summer, ranked Vancouver, Toronto and Ottawa outside its Top 50. Mercer’s survey of 214 cities monitors currency movements against the U.S. dollar. “Currency fluctuations do have an enormous impact on cost of living allowances,” says Eleana Rodriguez, principal in Mercer’s Information Products Solutions division. Even so, Vancouver ranks 75.

Crucially, the rising Canadian dollar thus far does not appear to have dissuaded Europeans from investing in Canada. Data collected by Statistics Canada show European foreign direct investment in Canada peaked in 2008. Despite the subsequent global economic turmoil, it held up remarkably well last year. “It’s not as if Europeans have panicked and pulled the plug and stopped putting money in,” observes Theriault. Part of the explanation probably lies in the fact that exchange rates are just one consideration — and typically not a determining one — when making such decisions. “It’s what you expect to make in terms of bottom line as a result of that strategic decision that’s important,” he explains. So long as the Canadian economy continues outperforming relative to others, complaints about the costliness of Canadian cities should remain muted.