Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Hotel Prices Are Surging Despite Slowing Tourism Demand
Transcript
- Lucas: If you've tried booking a hotel in Barcelona or Rome this summer, you've probably noticed something strange: prices are way up, even though it doesn't feel like everyone you know is traveling. Luna: I was looking at a weekend in Florence last month and the average room was over 300 euros a night. That's easily 30 percent more than two years ago. Lucas: Right. And the conventional story would be that post-pandemic revenge travel is still driving demand. But the data tells a more nuanced story. Tourist arrivals across the Eurozone this year are basically flat compared to 2025. Yet hotel revenue per available room — that's RevPAR — is up more than 12 percent year-over-year. Luna: So it's not more tourists. It's that the ones coming are spending a lot more. Or maybe it's just inflation hitting services now? Lucas: Both, actually. But there's a specific structural shift happening. Let's start with the mix of visitors. The US dollar has been strong — it's at about one point one four per euro, which means American tourists have roughly 15 percent more purchasing power than they did three years ago. And they're flocking to Southern Europe. Luna: So US travelers are effectively subsidizing hotel rate hikes? I've seen stats that American tourists spend about 40 percent more per day than the average European visitor. Lucas: Exactly. Hotels have figured out they can raise rates because that high-spending segment is still elastic. Meanwhile, domestic and intra-European tourists — who might be more price-sensitive — are being priced out of certain markets. But the hotels don't care, because the revenue per room is up. Luna: That feels a bit risky. What happens if the dollar weakens or the US economy slows down? We just saw US job creation drop to 57,000 in June and the unemployment rate tick up to 4.2 percent. That's not a collapse, but it's a clear cooling. Lucas: That's the big question. And it ties into a broader issue: labor force participation in the US hit its lowest level in 50 years outside of the pandemic. If Americans start pulling back on discretionary spending, the first thing to go might be that expensive European vacation. Hotels could be left with empty rooms and no way to quickly lower rates without hurting their brand. Lucas: But there's another factor keeping prices high: costs. Energy prices in the Eurozone are still elevated, and hospitality is energy-intensive. Plus, labor costs are rising. Remember last year when we talked about the two-speed labor market? That's showing up here. Luna: Hotels can't find enough staff, so they're paying more. And those higher wages get passed on to guests. So part of the price increase is just cost-push inflation. Lucas: Right. And it's not just wages. Many hotels invested heavily in upgrades during the pandemic — think contactless check-in, better HVAC, outdoor spaces. Those capital costs need to be recouped. So even if demand softens, they have a floor under prices. Luna: But if demand really drops, won't they have to cut rates? I mean, hotels are perishable inventory. An empty room tonight generates zero revenue. Lucas: They will, eventually. But the interesting thing is that they might not need to cut as much as you'd think. Because the supply side is constrained. New hotel construction in the Eurozone has been very slow — partly due to high interest rates, partly due to regulatory hurdles in places like Barcelona and Amsterdam that have actually restricted new licenses. So the number of rooms isn't growing much. Luna: So we have a supply crunch meeting a demand that's shifting toward higher spenders. That sounds like a recipe for sustained high prices, at least in the short term. Lucas: Exactly. And that's the angle I want to focus on today: the hotel price surge is not just a blip. It's revealing structural changes in the Eurozone tourism economy — from who visits, to what they spend, to how hotels operate. Lucas: Let's look at a specific case: Spain. In June, Spanish hotel rates were up 14 percent year-over-year, according to data from the national statistics institute. But tourist arrivals were only up 2 percent. So the growth is almost entirely from pricing power. Luna: And that's probably concentrated in the luxury and upper-upscale segments. Budget hotels might be struggling. Lucas: Exactly. There's a bifurcation. Four- and five-star hotels are raising rates aggressively. One- and two-star properties are barely keeping up with inflation. That's partly because the high-end hotels cater more to international tourists — Americans, Chinese, Middle Eastern — while budget hotels rely on domestic travelers and backpackers. Luna: And the Chinese market hasn't fully recovered. Outbound tourism from China is still below 2019 levels. So that's not driving the surge either. Lucas: Right. The American traveler is really the key. And with the dollar this strong, US tourists are trading up. They're booking the nicer rooms, eating at the hotel restaurants, using the spa. That lifts average daily rate across the board. Luna: But if the US labor market continues to cool, that could shift quickly. I mean, 57,000 jobs in June is not a strong number. And the participation rate falling is worrying — it suggests people are giving up looking for work. Lucas: It's a risk. But even if US demand moderates, there's still the broader global travel recovery. And we haven't even talked about business travel, which is coming back more slowly but still trending up. Conferences and corporate meetings are filling midweek rooms that used to be empty. Luna: That's a good point. Business travelers tend to pay higher rates and are less price-sensitive. So that adds another floor. Lucas: So what we're seeing is a structural shift in the hotel industry's pricing model. It's not just demand-driven; it's cost-driven and mix-driven. And that has implications for inflation measurement. The official CPI for hotels in the Eurozone is up about 8 percent year-over-year, but the actual experience for many travelers is much higher. Luna: Because CPI averages across all segments, including budget. So if you're a business traveler or an American tourist, you're feeling a lot more than 8 percent. Lucas: Exactly. And that's important for the ECB. If they're looking at services inflation, they need to understand that hotel prices are sticky and may not come down quickly, even if overall demand cools. That could keep core inflation higher for longer. Luna: So Christine Lagarde might have to think twice about cutting rates too fast, especially if services inflation remains elevated. Lucas: That's the connection. And it's a good example of how a micro phenomenon — hotel pricing — feeds into macro policy. So let's keep an eye on those RevPAR numbers in the coming months. Luna: Speaking of keeping an eye on things... I have to say, this kind of deep dive is exactly why people listen. And if you're finding value in these conversations, it really helps us keep going. Lucas: Yeah, absolutely. If walking through the economy with us has made something click, there's a simple way to support the show. It's at buy me a coffee dot com slash fexingo. Just a small gesture, but it goes a long way toward keeping this ad-free and independent. Luna: Totally. And no pressure — just if you feel like it. Either way, we're glad you're here. So back to hotels... Lucas: Alright, so another dimension here is the rise of alternative accommodations — Airbnb, Vrbo. In some cities, short-term rental listings are growing faster than hotel supply, and that's actually putting downward pressure on hotel rates in certain segments. Luna: But isn't that mostly in residential neighborhoods, not tourist centers? In Paris or Rome, the best-located properties are still hotels. Lucas: True. But in secondary cities like Valencia or Bologna, Airbnb has become a significant competitor. Hotels there can't raise rates as much because travelers have alternatives. So the price surge is very uneven geographically. Luna: That makes sense. So the headline 'hotel prices up 12 percent' masks a lot of variation. Some markets are booming, others are barely keeping up. Lucas: Right. And that's the nuance we try to bring. If you're an investor looking at hotel REITs or a policymaker thinking about tourism taxes, you need to know where the pricing power actually is. It's not everywhere. Luna: So what's your takeaway for the next six months? Are we going to see hotel prices keep climbing, or is a correction coming? Lucas: I think they'll stay high through the peak summer season, but we could see some softening in the fall, especially if US economic data continues to weaken. The wildcard is the euro-dollar exchange rate. If the dollar weakens, American demand could drop. But if the Eurozone economy picks up — GDP growth was 2.1 percent annualized in the first quarter — domestic demand might fill the gap. Luna: So it's a balancing act. Either way, the structural changes we talked about — labor costs, supply constraints, shift to luxury — aren't going away. Hotel prices may not return to pre-pandemic levels anytime soon. Lucas: Exactly. And that's a story worth following. Thanks for listening.