Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How Eurozone Rents Are Decoupling From Inflation
Transcript
- Lucas: If you're renting in a major Eurozone city right now, you've probably noticed something strange: your landlord is raising the rent faster than the official inflation numbers say prices are rising. Luna: Yeah, I moved to a new place in Berlin last quarter and the jump was brutal. But when I look at the Eurostat CPI, rent only goes up like 2 percent. That's not matching reality. Lucas: Exactly. And that gap is the subject of today's episode. Eurozone headline inflation has come down a lot — from double digits in 2022 to around 2.5 percent now. But rent inflation, as measured in the official indices, is actually accelerating. It's running at about 3.8 percent year-over-year across the bloc. And in cities like Berlin, Paris, Madrid, real-world asking prices are up 6, 7, even 8 percent. Luna: So the official data is understating the pain. Why? Is it just a lag issue? Lucas: Partly. The CPI rent component is a slow-moving index. It's based on a sample of existing leases, not new listings. So when a new tenant signs a lease at a 10 percent higher rent, that only gets averaged into the index over time, as old leases roll over. Economists call it 'rental equivalence lag.' But there's more than just measurement timing at play. Luna: Like what? Structural supply constraints? Lucas: That's a huge piece. Eurozone housing construction has been in a funk for years. Permits for new builds in Germany fell 27 percent in 2025 compared to 2022. France and Spain aren't much better. Meanwhile, population growth — partly from immigration, but also urbanisation — keeps adding demand. So you've got a chronic shortage that predates the inflation spike. Luna: And then on top of that, the ECB started cutting rates last year. Lower mortgage rates should, in theory, make buying more attractive, which might relieve rental demand. But that doesn't seem to be happening. Lucas: It hasn't, not yet. Partly because even with lower rates, home prices in many Eurozone markets are still near all-time highs. The affordability gap means a lot of potential buyers remain renters. And then there's the dollar factor. Luna: The strong dollar? How does that play into Eurozone rents? Lucas: Indirectly, but meaningfully. The trade-weighted dollar index is at 120.7, down slightly from its peak but still historically high. That's made US exports expensive and Eurozone goods cheaper by comparison. But it's also brought in more American corporate relocations, remote workers, and investors into European cities. They're competing for the same limited housing stock, particularly in prime urban areas. That pushes up rents for everyone. Luna: So the strong dollar is exporting some of its housing inflation to Europe. That's a fascinating cross-currency spillover. Lucas: It is. And the ECB is essentially powerless to address it. Rate cuts can't build more apartments. They can't stop people from moving to Berlin. And they can't fix the lag in the CPI methodology. So what you get is a disconnect: official inflation looks manageable, but renters feel like they're getting squeezed harder every month. Luna: And this has real political consequences. We've seen rent control measures in Berlin, Paris, even Madrid lately. But do those actually work? Lucas: The evidence is mixed. Berlin's rent cap was struck down by courts a few years ago, but they've since introduced a softer version. Paris has strict rent controls. The problem is that controls can discourage new supply. If landlords can't raise rents to cover maintenance costs, they might sell or convert units to short-term rentals, which actually reduces the long-term rental stock. So you get a policy paradox: trying to help renters can end up hurting them. Luna: So what's the way out? More construction? Subsidies for first-time buyers? Lucas: Most economists would say the only durable solution is building more housing, especially in high-demand areas. But that's easier said than done in countries with strict zoning, slow permitting, and high construction costs. The German government has pledged to build 400,000 homes a year; they're barely managing 250,000. Until that supply gap closes, rents will keep outpacing official inflation. Luna: And in the meantime, the ECB's inflation target gets muddied. If the CPI understates housing costs, maybe the economy is actually running hotter than the data suggests. Lucas: That's a real concern. Some ECB board members have started talking about 'owner-occupied housing costs' — a measure that would impute rent for homeowners. It's used in the US and UK, but the Eurozone has been slow to adopt it. If that were included, official inflation might be 0.3 to 0.5 percentage points higher. That could change the policy debate. Luna: Which means the ECB might have to keep rates higher for longer, even as the headline number looks good. That would be a tough sell to politicians who want relief. Lucas: It would. And it would also highlight something we don't talk about enough: the rising labor costs in construction. Wages for construction workers in the Eurozone are up nearly 5 percent year-over-year, partly due to labor shortages. That feeds into higher building costs, which feed into higher rents. It's a spiral. Luna: I want to stick with this rent-inflation disconnect for one more beat. You mentioned that real-world asking prices in cities are up 6 to 8 percent. Is there any data source that tracks that more accurately than the CPI? Lucas: Yes. Private platforms like Immowelt in Germany or SeLoger in France publish monthly rent indices based on actual listings. Those show much higher growth than the official statistics. But the ECB and Eurostat tend to rely on the slower-moving CPI because it's harmonized across countries. So there's a growing debate: should policymakers use private-sector data to get a real-time read? Luna: That feels like a no-brainer. But I guess standardisation is a legitimate concern. Lucas: It is. And you don't want to overreact to volatile data. But when the gap persists for two years, it's worth paying attention. Alright, I think we've covered the main angles. Let's wrap with a thought: the next time you see a headline that says 'Eurozone inflation under control,' ask yourself: whose inflation? Luna: And whether your rent check agrees. Lucas: Exactly. That's all for this episode. We'll be back with another deep dive soon.