Australian financial journalist Noel Whittaker says salaries may be much higher in the UK but the cost of living is way above that in Australia. Although it is wildly at variance with the exchange rate, his suggestion that purchasing power parity is reached by equating one Australian dollar to one British pound is in line with what I have observed too
I have just returned from a fact-finding trip to Britain. Let me assure you, from a financial point of view at least, that this is the lucky country. Now I know that Aussies look longingly at the salaries paid in Britain and imagine themselves living handsomely on 50,000 pounds a year, which is equivalent to $116,000 here, but you have to understand that prices there have the same nominal value as in Australia. A main course in a restaurant may be 30 pounds in Britain and $30 in Australia, so the cost of living is more than double ours. Believe me, it's a shock to the system to put 40 litres of petrol in your rental car and discover that the cost is 40 quid or $A88.
But that's not the end of it. There is a VAT (value added tax) of 17.5 per cent on most things you buy, and many restaurants add a 15 per cent compulsory service charge as well. It makes our GST of 10 per cent look cheap.
I discussed wealth-creation strategies with a director of a British firm that specialises in financial planning for high-net-worth people. He was green with envy at our superannuation system, and told me that most of his work revolved around estate planning because Britain had high death duties [Australia has none]. This is a rapidly growing market because property prices have been rising dramatically and more and more families are facing death duties as the family home is not exempt.
We discussed borrowing for investment, which is one of the best strategies to create wealth in Australia because the interest is tax deductible, and income from both property and shares carries great tax concessions. I was amazed to discover that investment borrowing is rarely used in Britain because there are no concessions whatsoever. If you borrow to invest, you pay tax at your top marginal rate on the income from that investment, yet you get no deduction for the interest. Therefore, you may be losing up to 40 per cent of the income in tax while being forced to pay the interest from after-tax dollars.
Housing affordability is a hot topic in Britain, just like in Australia, and some building societies have even gone to the extent of lending far more man the value of the house. One newspaper gave the example of a couple with no deposit who were buying their first home for 152.000 pounds, the average home price. and who were able to qualify for a loan of 190,000 pounds to enable them to consolidate their other debts and get a foothold in the housing market. This means that they will have a negative equity in their home for many years and will be reliant on capital gain to get back to square one. This is a high-risk situation and, to make matters worse, the Bank of England lifted interest rates to 5.75 per cent earlier this month, putting further pressure on home-owners' budgets and increasing the prospect of a fall in home prices.
We had a break in Spain on the way home and the conditions are no different there. In Spain, VAT is 16 per cent and our tour guide in Valencia was bemoaning the fact that home prices had risen so much that she had been forced to take out a 40-year mortgage just to buy a unit [condo].
The above article appeared in the Brisbane "Sunday Mail" on July 29, 2007
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