The collapse in sterling and a decline in property rental values driven by the recession have sent London tumbling down the list of the world’s most expensive cities for expatriates.

London was ranked third out of 143 cities worldwide last year in a cost-of-living list compiled by Mercer, the consultancy — but this year it has plunged to sixteenth place.

The other British cities included in Mercer’s survey, which is used to help multinational companies and governments to determine pay allowances for their expatriate employees, also dropped sharply. Birmingham fell from 66th place to 125th and Glasgow sank to 129th from 69th, making them cheaper locations for expatriate workers to live than the capital cities of Lithuania (Vilnius), Jamaica (Kingston) and Colombia (Bogotá).

In the survey, New York is used as the base city for the index and scores 100 points, with all cities measured against New York and all currency movements against the US dollar. London, which scored a notional 125 when the survey was carried out in March last year, scored only 92.7 this year.

With the dollar also having risen against most European currencies this year, including the euro, a number of European cities were deemed to be less expensive than they were in 2008. Paris, Amsterdam, Dublin, Oslo, Rome, Warsaw and Vienna were all ranked lower than last year.

Tokyo tops this year’s rankings, being scored at a notional 143.7, with another Japanese city, Osaka, in second place. Moscow, ranked as the most expensive city for expatriates last year, drops to third after a dramatic fall in the value of the rouble against the US dollar and a decline in Moscow rents. Geneva and Hong Kong make up the rest of the top five.

Apart from Japan, the biggest gainers in the rankings were cities in the United States, China and the Middle East, with New York itself returning to the top ten and Beijing jumping from twentieth to ninth. The Chinese cities Shenzhen, Shanghai, Guangzhou and Tianjin were all big risers, while Dubai and Abu Dhabi rose sharply in the rankings, because of the way in which the UAE dirham is pegged to the US dollar.

Nathalie Constantin-Métral, a senior researcher at Mercer, said: “With significant exposure to multiple economies and currencies, multinational companies continue to be greatly affected by the financial crisis. The cost of expatriate programmes is heavily influenced by currency fluctuations and inflation rates.

“Keeping track of the change in factors that dictate expatriate cost of living and housing allowances is essential. It is important for multinational companies to continuously benchmark against their peers to ensure compensation packages are fair and in line with the rest of the market.”

Mercer compared the price of more than 200 goods or services in each location, including the cost of renting a luxury two-bedroom unfurnished apartment per month, a bus or underground ride, petrol, coffee and milk.

World’s most expensive cities for expatriates in March 2009

1 (2) Tokyo 143.7 (127) 2 (11) Osaka 119.2 (110) 3 (1) Moscow 115.4 (142.4) 4 (8) Geneva 109.2 (115.8) 5 (6) Hong Kong 108.7 (117.6) 6 (9) Zurich 105.2 (112.7) 7 (7) Copenhagen 105.0 (117.2) 8 (22) New York 100.0 (100.0) 9 (20) Beijing 99.6 (101.9) 10 (13) Singapore 98.0 (109.1) Source: Mercer. Last year’s figures in brackets