Seoul No Longer Cheap for Expats

The South Korean capital and business center has nudged aside Tokyo and Hong Kong as the region's priciest city for foreign executives

by Bruce Einhorn

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Quick, name the most expensive city in Asia. Easy, right? It's got to be Tokyo. Japan is famous for its $7 lattes and $500-a-night business hotels. If not Tokyo, then definitely Hong Kong, where housing costs are hitting the stratosphere again.

Wrong on both counts, a new survey reveals. For the past year or so, South Korea's capital and business hub, Seoul, has led all comers when it comes to cost-of-living levels for foreign executives.

A new survey by London human resources consulting firm ECA International ranks Seoul the most expensive place in Asia for foreign executives to live and work. The firm provides multinational companies data on how to compensate employees sent to high-cost locations. ECA looks at the prices of more than 100 items, ranging from a kilo of rice to a night at the movies to a new washing machine.

So why is Seoul so pricey? The steady rise of the South Korean currency, the won, against the U.S. dollar has made the city far more expensive for expatriates. The won has appreciated more than 20% in the past three years vs. the greenback.

A Dubious Honor

And with interest rates in Korea at their highest in six years, the currency appreciation is likely to continue. While the Federal Reserve is holding rates steady in the U.S., the Bank of Korea on Aug. 9 announced a surprise interest rate increase of 25 basis points, putting the overnight call rate at 5%. Meanwhile, rates in Japan remain close to zero, helping to fuel the carry trade that has seen speculators borrow money in yen in order to buy higher-yielding currencies like the won.

So Seoul, a city that used to be quite reasonably priced for foreigners, is now even more expensive than Tokyo. "Five years ago, the average expatriate was paying about 35% more for goods and services in Tokyo than in Seoul," says Lee Quane, Hong Kong-based general manager for ECA International. "Now, with the huge appreciation of the won over the past three years, Seoul is now 10% more expensive than Tokyo."

Seoul isn't the only Asian city becoming pricier thanks to the steadily declining U.S. dollar. In Beijing and Shanghai the cost of living is heading north. So, too, in Singapore. It's not just currency swings making Singapore more expensive, though. The Southeast Asian city-state increased its goods and services tax from 5% to 7%, effective July 1.

And Then There's Housing

ECA concluded its research in March, so the impact of the Singapore tax increase won't show up in the firm's rankings until next year. "We will be looking at how this pushes Singapore further up the list," says Quane, who adds that despite the price pressures, Singapore is still "about 10% cheaper" than its regional rival, Hong Kong.

Although Hong Kong's dollar is pegged to the U.S. dollar and currency swings are less of an issue for the Chinese special administrative region, rents for expat-style apartments in Hong Kong are going through the roof. (ECA, however, doesn't include housing in its cost-of-living survey, since most multinationals calculate housing costs separately.)

One surprise comes at the bottom of ECA's list. Right before Mongolia's Ulaanbaatar—the cheapest major city in Asia of the 41 surveyed by ECA—is Bangalore (Mumbai ranks 24th, Delhi 25th). At a time when companies are griping that salaries in Bangalore are on the rise, how can India's high-tech hub, home to so many Western multinationals, remain so cheap?

It's a simple case of supply and demand, says Quane. He thinks Bangalore's popularity has translated into greater supply of the sort of products that ECA surveys. "Essentially, Bangalore is a relatively well-developed second-tier city," he says. "There's probably a much wider variety of international goods in Bangalore than in more recently developed Indian cities like Pune."

For more on Asia's priciest cities, see BusinessWeek's slide show.

Einhorn is a correspondent in BusinessWeek's Hong Kong bureau .