Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Eurozone Rental Markets Are Pricing Out Young Workers
Transcript
- Lucas: So Luna, I was looking at the latest ECB data on rental prices across the eurozone, and there's a number that stopped me. Since the start of 2024, rents are up more than nine percent on average, and in cities like Berlin and Madrid, it's even steeper. Luna: Nine percent over two years doesn't sound catastrophic at first. But when you stack it against overall inflation running at two and a half, it's really outpacing everything else. Lucas: Right. And that's the angle I want to dig into today. This isn't just a housing story. It's becoming a macro story — for the European Central Bank, for wage negotiations, for the whole inflation outlook. We're talking about a structural shift in how much of a worker's paycheck goes to rent, and that has ripple effects. Luna: I keep hearing about young people spending forty percent of their income on rent in some cities. That sounds unsustainable. Lucas: It is. The ECB's own research shows that the average renter in the eurozone spends about a third of their disposable income on housing, but for under-thirties in big cities, it's often closer to forty-five percent. And that number is creeping up because rent is growing faster than wages in most member states. Luna: So how does that feed back into the ECB's inflation targeting? They don't directly target rents, do they? Lucas: They don't target them, but rents are a big component of the inflation basket — around ten percent of the harmonised index, actually. And here's the thing: the ECB's own forecasts have systematically underestimated rental inflation for the last two years. They kept assuming it would cool off, and it just didn't. Luna: Why the miscalculation? Is it just supply constraints, or is there something else going on? Lucas: Partly supply, partly demographics, partly a shift in preferences. After the pandemic, everyone wanted to live in cities again — young people especially. But construction of new housing in the eurozone has been falling for a decade. In Germany, new building permits are down about thirty percent from their 2018 peak. So you've got more city-seekers chasing fewer units. Luna: And that's not something the ECB can fix with rates. That's a structural issue. But it's causing the ECB a real headache, right? Lucas: Exactly. Because if rent keeps climbing at four to five percent a year, headline inflation is going to stay sticky. It doesn't matter how much the ECB tightens — they can't build apartments with monetary policy. So they're stuck with an inflation rate that's partially out of their control. Luna: I remember reading that the ECB started to adjust how it measures rents — trying to get more real-time data. Is that helping? Lucas: A bit. They've been experimenting with web-scraped listing data to get a faster read on market rents, rather than the slower survey-based measures. But there's a catch: the official index still lags because it's based on existing leases, and most tenants in Europe have long-term contracts. So even if new rents are soaring, the average rent paid only rises gradually. Luna: So the official number understates the pain new renters are feeling. That's a real gap. Lucas: It is. And it's a gap that matters for wage negotiations. Because workers look at what they'd pay if they moved, and that's feeding into wage demands. The ECB has been worried about a wage-price spiral, and housing is a big part of that story. We saw it in the Netherlands last year — unions explicitly cited rent increases when pushing for double-digit wage hikes in the public sector. Luna: And those wage hikes, in turn, keep services inflation elevated. So it's a loop. Lucas: A loop that the ECB can't easily break. But there's another twist. Some companies are starting to step in. Co-living providers are signing corporate leases — they bulk-rent apartments and offer them as a benefit to mobile employees. It's like a modern version of company housing, but more flexible. Luna: I've seen that. Firms like Habyt and Quarters are expanding across Europe. They're aiming at the young professional who doesn't want to deal with the hassle of finding a flat in Berlin. Lucas: Exactly. And that's a rational response to the market, but it doesn't solve the underlying shortage. It just shifts who gets access. And it could even push rents higher in some neighborhoods, because these operators are competing with individual renters for the same limited supply. Luna: So what's the realistic endgame here? This seems like a problem with no easy fix. Lucas: Well, the ECB would argue their mandate is price stability, not housing policy. They just have to factor rents into their forecasts and hope governments act on supply. And some are trying — Spain's new housing law, Germany's efforts to boost social housing. But these take years to bear fruit. Luna: And meanwhile, the people feeling it most are young renters. It's a generational divide too, isn't it? Lucas: It's stark. In Berlin, the average rent for a new lease is now over sixteen euros per square meter — that's up fifty percent from 2019. A two-room flat in a decent neighborhood easily costs twelve hundred euros a month. For someone starting out as a consultant or in tech, that's a huge chunk of their take-home. Luna: And I think that's why we're seeing this become a political flashpoint. I mean, just last weekend, there were protests in Lisbon about evictions and rent increases. Lucas: Lisbon, Barcelona, Amsterdam — it's the same story. And it's not just about housing costs, it's about the kind of society you end up with. When only the well-off can afford to live in city centers, you lose the diversity that makes cities work. Luna: You know, this conversation reminds me of something. If today was actually useful to you, the way these episodes stay ad-free is listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's a nice way to keep this going. Every little bit helps us keep digging into these stories. Luna: And we appreciate it, truly. So, back to the rent crisis — do you think the ECB will ever start incorporating housing market data more directly into its policy decisions? Lucas: It's already happening, in a way. The ECB's new strategic review, which finished in 2021, explicitly said they'd pay more attention to housing costs. And they've been monitoring house prices separately from rents. But they've stopped short of targeting asset prices directly. They argue it's not their job to pop bubbles. Luna: But if rent is part of the inflation basket, and it's persistent, then it's indirectly influencing their interest rate decisions. So they're already deep in this. Lucas: Deep is the word. And that's why we're seeing this tension — the ECB might have to keep rates higher for longer, not because wages are spiraling, but because rents won't stop climbing. It's a slow burn, but it's the kind of structural pressure that defines this decade in Europe. Luna: So, if you're a young worker listening, what's the takeaway? Is it just, 'move to a cheaper city'? Lucas: That's part of it, but it's not always feasible. I think the bigger takeaway is that this isn't going to resolve itself quickly. It's going to be a political and economic issue for the next decade. And for investors, it's a signal — real estate in European cities remains a valuable asset, but it also means more pressure on governments to intervene. Luna: It's a complex web, but understanding it helps you see why inflation is sticky and why the ECB is in a tough spot. Lucas: Exactly. And that's the kind of thing we like to unpack here. Next time you see a headline about eurozone inflation, remember the rent story underneath.