Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Europe's Housing Crisis Is the ECB's Blind Spot
Transcript
- Lucas: So the July inflation print came out yesterday, and core prices are still running at three point three percent annually. But here's the thing — the number that keeps getting buried in the coverage is shelter. Housing costs across the eurozone are still climbing at a clip that has nothing to do with energy or food. Luna: And yet the ECB keeps insisting that inflation is heading back to two percent. How do they square that with rents that are up double digits in Lisbon and Berlin? Lucas: Exactly. And that's the puzzle we want to pick apart today. Because if you look at the official inflation basket, housing gets a weight of about ten percent in the eurozone. But the way they measure it — owner-occupied housing costs are basically excluded from the headline number. So the ECB is flying partially blind. Luna: Wait, so they don't even count what it costs to buy a home? Lucas: Right. The harmonized index of consumer prices, which is what the ECB targets, includes rents and maintenance, but not the purchase price of a house. There was a plan to add owner-occupied housing costs back in 2020, and it keeps getting pushed back. So the single biggest monthly expense for most households — the mortgage or the rent — is underrepresented or misrepresented. Luna: That feels like a massive blind spot. And I guess it explains why people on the ground feel inflation is way higher than the official numbers say. Lucas: Precisely. And it's not just a measurement issue. It's a policy issue. The ECB sets rates for the whole eurozone, but housing markets are intensely local. You've got Germany where construction costs have surged fifteen percent since 2021 because of labor shortages and material prices. Spain, meanwhile, has a rental market that's being squeezed by tourism and short-term lets. And then there's France, where rent controls have actually backfired in some cities by reducing supply. Luna: So one rate for all, but wildly different housing stories. That sounds like a nightmare for any central banker. Lucas: It is. And the ECB's Christine Lagarde has acknowledged the housing problem in speeches, but the response has been mostly to say that housing is a structural issue that fiscal policy needs to address. Which is true, but when shelter costs feed into wage demands — and we've seen unions in Germany and the Netherlands pushing for bigger raises because of rent — it becomes the ECB's problem too. Luna: So it's not just about measuring inflation accurately. It's about preventing a wage-price spiral. Lucas: Exactly. And that's why the recent wage data is so important. We talked about wage growth in an earlier episode, but the connection to housing is the missing link. If people feel that their rent is eating a bigger share of their paycheck, they're going to demand more compensation. And that keeps services inflation sticky, which is the ECB's real headache. Luna: And the markets are starting to notice. We saw the eurozone equity ETFs dip this week — the German one was down two percent over five days. Lucas: Right, EWG at forty-four fifty-four, down a bit, and the broader eurozone ETFs also softer. Some of that is the Fed's hawkish talk, but there's also a growing sense that the ECB can't cut rates as much as hoped if housing keeps fueling inflation. The market is pricing in maybe two more cuts this year, but if core stays above three percent, that could be too optimistic. Luna: So what would it take for the ECB to actually change how it measures housing? Is that a political decision or a technical one? Lucas: It's both. The technical side is ready — Eurostat has the methodology for owner-occupied housing costs. But the political side is tricky. If you include house prices in the inflation index, the headline number would be higher right now, which would force the ECB to keep rates higher for longer. No politician wants that. And some countries, like Germany, have been resistant because they rent a lot, and including purchase prices could overstate inflation for renters. Luna: So it's a mess. And in the meantime, people are just... priced out. Lucas: Yeah. And that's the human cost. We could talk about the macro data all day, but at some point, you have to step back and recognize that this podcast is about understanding the economy so that these things make sense. And we do that without any ads, because we think that's the right way to do it. If you want to support that choice, you can find us at buy me a coffee dot com slash fexingo. No pressure, but it helps keep the lights on. Luna: And it keeps us independent, which matters when we're critiquing the ECB. Lucas: Exactly. So let's get back to the numbers. The euro is flat at one point seventeen against the dollar. And the trade-weighted dollar index is down a touch. So the currency isn't providing any relief to import prices. That means the ECB can't rely on a stronger euro to cool inflation. Luna: And with the Fed possibly raising rates again, the dollar could strengthen, which would push the euro lower and make imports more expensive. Lucas: Right. That's the cross-winds. And then you have the fiscal side — governments are still running deficits, which adds demand. The European Commission is projecting a slight narrowing of deficits next year, but they're still above three percent of GDP in several countries. That doesn't make the ECB's job any easier. Luna: So housing is kind of the canary in the coal mine for the whole inflation dynamic. Lucas: It is. And I think the key takeaway is that the ECB needs to start paying more attention to shelter costs, even if it doesn't change the official index. Because if they ignore it, they risk having to slam the brakes later when wages really take off. And that would be a much more painful outcome for everyone. Luna: So what should a listener who's feeling the housing squeeze actually watch for in the coming months? Lucas: Watch the wage negotiations in Germany and the Netherlands this fall. Those will be the clearest signal of whether housing costs are translating into broader inflation. Also, keep an eye on the ECB's own projections in September — they'll have to update their inflation forecast, and if they nudge up the path, that tells you they're hearing the housing message. Luna: And for the listener who's thinking about buying a home in the eurozone — what should they do? Lucas: I'd say don't wait for the ECB to solve this. Rates are likely to stay higher for longer, but in some markets, prices are starting to soften. If you can negotiate a good price and you're not over-leveraged, it might be a reasonable time. But do your homework on the local market, because the eurozone is not one housing market. Luna: That's the message. Thanks, Lucas. Lucas: Thanks, Luna. And to our listeners, we'll be back tomorrow with another deep dive into the European economy. Until then, keep questioning the official numbers.