A report by The Economist's Intelligence Unit called the "Worldwide cost of living index 2013" has named two of Australia's major cities in the top five most expensive cities in the world to live in. Sydney ranked third behind Japan's Tokyo and Osaka, while Melbourne took fifth spot after the Norway's capital, Oslo.

The index, which compares all cities with New York and US dollars revealed that the price of a loaf of bread skyrocketed in Sydney from $1.81 a decade ago to $3.48.

"Australian cities have been rising very quickly up the rankings as economic growth has supported inflation and currency swings to make them costly," the report says. Indeed, just ten years ago, Australian cities didn't even make it into the top 50 most expensive cities in the world. In fact, it was only two years ago when an Australian city cracked the top 10.

Moreover, a recent report by Deutsche Bank revealed that Australians pay among the highest prices on the planet for goods and services. The report, which tracks the prices of an array of items in cities and countries around the world, found that Melburnians and Sydneysiders pay almost 40 per cent more for movie tickets than those in Manhattan or Paris, while a two-litre bottle of Coca-Cola at a supermarket in Melbourne or Sydney costs almost 50 per cent more than in Berlin or Auckland. Australians are also said to be paying 26 per cent more for an iPhone than US consumers, and 13 per cent more for an Apple Macbook.

It's difficult to pinpoint why imported goods are more expensive in Australia, especially when the Aussie dollar has been relatively strong and Australia's low import tariffs compared with Europe and the US, should be offsetting importing costs. "It is about marketers deciding what is the highest price they can charge," said Alan Kirkland, chief executive of consumer watchdog, Choice, who told Fairfax that companies are charging more for products in Australia simply because they can. ''Australians have historically paid more for a whole range of goods... but in many cases when you put it to the test the increased cost of selling in Australia just didn't hold up any more.''

Furthermore, Australia's service industries are also said to be impacting heavily on the cost of living. According to the same Deutsche Bank report, the cost of labour and non-tradeables such as hotel rooms and education are expensive by world standards due to Australia's high wages. The report showed that wages in Australia are about 50 per cent higher than in the US or New Zealand, with the average weekly earnings rising roughly 3.5 per cent a year for the past five years. Australian wages have also outstripped inflation for more than a decade, leaving more money in the average Aussie's pocket.

"[It costs more in Australia] to pay a person to sit in a retail shop or to operate a website or to distribute an item. It is not necessarily a bad thing but a high income, high cost country shows up in the prices that we pay,'' said economist Stephen Koukoulas, managing director of Market Economics. "If you want to pay the same as what Americans are paying, then accept American wages. You can't have the low prices without the low incomes."

According to the 9th Annual Demographia International Housing Affordability Survey, homes in Sydney, Melbourne, Perth and Adelaide are in the top three per cent of the world's most unaffordable housing markets with homes said to be costing six times the average household income. The report ranked 30 housing markets in Australia as severely unaffordable and nine seriously unaffordable.

Report co-author Hugh Pavletich said the high prices are mainly due to a lack of available land. "It is really up to state governments and local governments to deal with this issue and make sure that lots on the fringes of the cities can be provided at $40,000 to $50,000 each, not the stratospheric prices that they are currently being charged," he said. "Melbourne and Sydney are far more expensive in relation to wages than what London and New York are, so it's completely absurd. In fact, it's a national disgrace."

Economy Watch