Why is cost of living in UK so expensive?

Readers Question: Why is cost of living in the UK so expensive?

The cost of living depends on:

  • The price of basic necessities – food, fuel, heating, transport, housing/rent, entertainment.
  • The effective cost of living also depends on real wages. It is expensive to live in Nordic countries, but real wages tend to be higher. For items, such as eating out – the US is often cheaper than many European countries, but Americans need to spend much more on private health care insurance.

Summary – Why is the UK so expensive.

The biggest factors in determining cost of living are wage rates and housing costs. The UK cost of living is relatively high, but this also reflects the relatively high wages in the UK. The housing market is an additional complication with rising house prices and rents increasing the cost of living and associated costs. However, this tends to be quite regional with people living in London affected much more.

To a lesser extent, the UK cost of living is also affected by relatively higher transport and energy costs. Tax rates are important for goods like alcohol, petrol and cigarettes with UK tax rates higher than European / US rates.

However, although the UK is expensive in some areas, in other areas it is cheaper. e.g. US is much cheaper to eat out, but in US you have to pay private healthcare insurance.

Comparisons with other countries

To make comparisons with other countries, we can convert the price of basic necessities, into a common currency (e.g. dollar or Pound Sterling) and make comparisons.

Top 10 countries by cost of living.

cost of living
Cost of Living. Source: Numbeo (click to enlarge)

 

According to Numbeo, the UK is the 12th most expensive country to live in out of 122 surveyed. (2016). The UK average is 0.81 the cost of living in New York.

If we measure according to local purchasing power (cost of living / average wage), the UK is the 22nd most expensive out of 122.

By comparison, Norway is the fourth most expensive at 0.99 and India the cheapest at 0.24

Regional differences

Firstly, the cost of living in the UK varies considerably by regions.

For example, the cost of living in London is 15% higher than Manchester. Including rent, London is 52% more expensive than Manchester. (Numbeo)

Why is the UK so expensive?

  1. Housing. A key factor in the UK cost of living is the UK housing market. Prices have been rising faster than inflation throughout the post-war period.

real-trend-house-pricesAfter the 2008 credit crunch, house prices in Ireland, Spain and the US fell by up to 50% and remained low, but in the UK, the price fall was more moderate and have recovered much more strongly. The main reasons for expensive house prices in the UK are:

  • Shortage of supply – low numbers of new houses built.
  • Rising number of population. UK population rising, plus number of households increasing due to social factors, such as more people living alone.
  • Housing seen as a good investment encouraging more to try and get on property ladder, even if it requires large borrowing (from banks / parents)
  • See more on: Why are UK house prices so expensive?

The impact of housing on living costs

Rising house prices don’t directly affect everyone’s living costs. But, the rise in house prices and difficulty many face in buying a house have caused rents to rise, especially in property hot-spots like London.

  • Rising rents and property prices also tend to have an upward impact on other costs of living. High house prices have encouraged people to live further away from work. Many commute to London from a long distance, putting upward pressure on train demand, leading to higher rail fares.
  • Rising rents put upward pressure on wage costs to attract staff in places like London.

2. Transport

UK transport is relatively more expensive than other countries.

UK petrol tax is relatively high, which increases the cost of driving. (From an economic perspective the relative high levels of congestion on UK roads could be a justification for higher petrol costs.) The price of motoring is likely to rise as UK roads become more congested. IN the long-term, electronic road pricing is more likely in the UK than countries with lower population densities.

UK train fares. UK train fares have been rising faster than inflation and the UK commuter tends to spend a higher percentage of income on rail fares than European counterparts. According to Guardian:

“A British worker on an average salary of £27,200 a year will be spending 17% of their wages on a £391 monthly season ticket from Brighton to London once the fare rises come into effect, according to the analysis. Workers making similar journeys spend 12% of their salary on train fares in France, 9% in Germany, and 6% in Spain and Italy.”

The UK does have cheaper off-peak fares, booked in advance, but travel same day, business tickets tend to be more expensive per mile, than European counterparts.  Reasons for expensive train fares, include cost of investment in infrastructure (wage costs), privatisation and loss making nature of some lines.

3. Privatisation

Some people have put forward the argument that privatisation has been a factor behind the higher cost of living in the UK. With rising prices in trains, gas and water caused by private companies seeking to make higher profit. For example, falling prices of oil and gas has often not been passed quickly on to consumers. According to this site (Corporate Watch)

“Between 2007 and 2013, household gas and electricity bills rose in real terms by 41% and 20% respectively. In real terms, water bills have increased by 50% since privatisation, while rail fares are 23% higher than they were in 1995.”

However, privatised companies (unsurprisingly) disagree. They argue that only a small % of the final price is a profit margin (e.g. 3% for train companies). They argue the rising costs are associated with the expensive costs of running services and the capital investment to keep the infrastructure up and running. Also, it is important to note that not all privatised industries have performed the same. After privatisation, prices of telecoms fell significantly, due to improved technology. Sometimes, we are selective – high price increases stick in the mind, price falls are less visible. Many people tend to over-estimate their own inflation rates.

Also, these markets are regulated by OFGEM and OFWAT who have, in theory, the power to limit price increases by these monopoly firms.

4. Real inflation rates.

The CPI measures a typical basket of goods. However, people on low incomes and pensioners may not buy the typical basket, but just buy basic necessities, like food, travel and household expenditure. At certain times, this basic basket of inflation may rise faster than the official CPI. For example, luxury items like electronics may fall, but food could increase by more than CPI, therefore, people on low incomes may have a rise in the cost of living, which is greater than actual inflation. For example, research by Joseph Rowntree Foundation found that in 2013, the cost of living for poor people rose 25% – more than the 17% official CPI inflation.

5. Wage costs

A key factor in the cost of living will be wage costs. Rising wages will lead to higher cost of services, such as hairdressing and restaurants. The UK has a relatively higher minimum wage than say the US. The new ‘living wage’ will increase minimum wages even more. This is likely to feed into higher costs for services, such as cleaning, and entertainment. It will increase the cost of living, but at the same time, the increase in real wages will make living costs more affordable for those on low income.

In making international comparisons, there is a strong link between relative wage costs and average costs of living. For example, India, the cheapest country for cost of living has a monthly wage of $295 (ILO stats). The UK has the 5th highest average wage at $3,065 per month.

6. Real wage stagnation

uk-real-wages-07-17

Since 2007, real wages in the UK have stagnated. Inflation has been higher than nominal wage growth.

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16 thoughts on “Why is cost of living in UK so expensive?

  1. i don’t put up with it. if something is expensive i wont buy. i’ll get it from Europe or USA. I grew up with military in Europe so i understand prices & is the reason at age 50 i’ve never bought a house. ive never found one at a good price & worth my hard-earned cash. I can’t even eat out! i don’t understand why the prices are so much more worst than eating out in Italian restaurant. in UK we are snookered really no home comforts when you work 3 jobs & still can’t enjoy going out once in a while. Our Govmt, Customs has ruined UK lifestyle.

  2. i agree, the goverment care as there in bed at the hips on rents. One day they will have property standing empty because we simply will turn around and say you know what im not paying that anymore, your asking rent is just silly and greedy. The problem is rent has become som what of a fahsion item, which is even more silly. Out priced and out of luck, so this is life of today. So much for tony blair we aim to make a fair britian, bah hum bug. More and more people saying that they will not and would never pay these rents of today, its just pure greed. Its time the people spoke up and started to realise you are being ripped off, all your wages to some point going on just rent that is just outrages i refuse to do that also, no house or apartment is worth that. You are hardly ever there as most of the time you are at work. I here more and more people saying they can,t watit to move out of there property and get some thing cheaper as its just too much too take on. I agree its time to lower the rents you have gotten greedy and out of touch on what people can afford. I say go cheap stuff the flashy house, and spend your money on you and stuff your flashy apartment i can live with out it and ill still be here tomorrow and the next day and so fourth and so fourth. uk rents are out of control stop paying out so much on rent its gotten silly in uk, they can,t rent it out if nobody rents it out can they, simple as that. I go cheaper also now, i got tired of throwing my money at companies and bills so i have cut down on spending massively i advice you to do the same, its wonderful.

    1. May be a bit cheaper in the states mate but we are all in the same boat. Rent and energy Costs are crazy.

  3. How about building more cheaper homes (high-rise etc) and creating more part-time jobs to bring the cost of living down? The ever growing gap between the rich and poor is unsustainable, particularly in the South East of England where I live. I have never seen so many people begging on the streets of Portsmouth and Southsea for example. This is not how we want our country to be.

  4. An interesting article but the author misses one critical factor. Aside from wages, the biggest driver behind cost is the availability of credit. In the UK, it is far too easy to get large amounts of credit from banks and credit card companies etc. This means people have more disposable income to spend on consumer items. The problem is that credit from banks is actually a debt, so you simultaneously drive up consumer prices while becoming poorer at the same time.

    Incidentally, credit is the primary driver behind house prices, while wages are the primary driver behind rental costs.

  5. The rich get rich poor stay poor, that’s just the way it is. As for high wages that’s a joke I haven’t seen wages rise in 15 to 20 years at least for average person in low paid jobs this country is a complete joke yours faithfully ex lover of London and our shower of shit government

    1. I agree with you. For a person who is at least 25 years old the minimum wage is £7.50 ph now. That is before tax and deductions. If you are paid this wage you will take home approx.£1050-1100 per month. In London you will not find a flat for that kind of money and I mean only the rent so how can you pay for everything else like gas, council tax, water, electric, food, fuel/transport, clothes etc.etc.?!? And even if you rent just a room that is going to cost you at least £550 pcm (if you are lucky) to £800 or more! I know that not everyone earns minimum wage but even if you take £30k before tax you are not rich and probably still need to rent out a room in London and southern parts of the country. UK is very expensive and wages are low unless you are a doctor, lawer or banker etc. 🙁

  6. You clearly have no understanding of how poorly doctors are paid in the UK by an undervaluing bunch of self interest money grabbing bastard politicians. I can tell you once the NHS disintegrates, and it will under the Tories, you will all be paying through the nose for health insurance. Bankers and lawyers, I agree are vastly overpaid in the UK, but medics are hugely undervalued and underpaid compared to any western nation. As one, I will probably look to move somewhere where I am better appreciated and rewarded. NHS does not deserve us. Unfortunately serving the public is a reward but not enough to pay the ridiculous taxes / mortgage etc…

  7. I have to agree. Starting Salary of around 60k is pretty low compared to USA. Over here the Politicians with their campaign contributions and monopoly / for profit health insurance companies and the AMA keeping the supply of Doctors low insures a wealthy crime family and no National health insurance. Doctors here are the wealthy class. Worldwide there is a Class war. Over there Thatcher helped export UK Jobs. You have the same system as the USA. A business class party with 2 factions. I can see the NHS over there and other social programs go.

  8. Failed governments and captured regulators as well as endemic prebendalism and corruption and why the UK is so expensive.

    These so called privatisations are actually species of theft in as much as members of government rent seeking by aspices of their office. They should be reversed root and branch and all losses to the taxpayer clawed back and perpetrators should be duely prosecuted.

  9. The real rip off is executive pay. When a company declares a gross profit of 2 million pounds leading to a net 1.4 million loss has paid its CEO a 9 million salary plus 500k in bonuses how does this not attract government attention? The total executive pay of such a company is likely in the order of 20 million at least. And that’s without taking into consideration the directors, who determine exec pay. This company gets an overall tax refund which gets ploughed back into exec bonuses. That is the real rip off and the real cause of the problems we see now.
    The average exec does not contribute anything tangible to the company and spends less than half the time at work that other employees do. Their education level is almost never better than that of a specialist nurse for example.
    I have no gripe with founder managers or directors being well paid. Career executives on the other hand who are on 500k at the age of 30 whose idea of improving company performance is retrenchment of hundreds or thousands of the people who actually made the company on the other hand after vampires who deserve to be taxed at 80 per cent

    1. 8 hours a day, 5 days a week on £8 per hour is going to be around £16 K per anum and you’re going to be taking home about £1155 after tax (might be a bit lower).

      So let’s look at the cost of renting. Just to rent a room in Surrey/West Sussex is going to be about £700 per month, so you have £455 to live on as long as you aren’t paying any other bills. If you go somewhere like Nottingham, the rent will be significantly lower. It really depends on where you are going.

      I’d say that if you want to eat a decent diet and actually be able to afford to go out once a month for dinner, you’d need about £450 to yourself after bills. What I would advise is that you check http://www.rightmove.co.uk as that shows you housing prices in the areas you are looking for. Also, have a look at the local bus/train routes in the location you are looking to move too and see what kind of travel costs you will have. My Dad got me a motorbike when I was 17 and after you have brought the vehicle, the travel costs yearly for the bike (125cc) is cheaper than yearly public transport.

      But if you want to risk it, do it. You only live once, you might be more resourceful than some of the people on here. But you must do your research so you don’t end up shit creek without a paddle. Good luck.

  10. High wages? They’re so low considering the cost of rent (obviously can’t afford to buy a property) and goods, and especially compared to other European countries. The cost of living in the UK is so expensive because it is not commensurate with low wages.

  11. in the UK we have governments that are out of touch with the common people. they are all fucking useless. they do not care about the working poor. they just wont to kick them some more.

    The basic annual salary for MPs is £74,962, not including expenses, while the UK median pre-tax full time salary is £27,600. MPs earn more than the bottom 90% of the country.
    * Less than 2% of UK adults are millionaires, while at one point two thirds of David Cameron’s cabinet were millionaires. Theresa May’s cabinet was similarly unrepresentative.

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