Real estate prices in Germany have been rising steadily for years.
(Photo: imago images / Jürgen Schwarz)
Frankfurt / Berlin The prices are rising. The inflation rate just doesn’t fully reflect that. The so-called harmonized index of consumer prices (HICP), which the European Central Bank (ECB) uses to track price developments, does take rental costs into account. However, the costs for living in your own property are missing.
From 2026, the ECB wants to change that and include owner-occupied residential property in the inflation rate. If it did that now, inflation rates would be higher. The consequences would be particularly severe in individual euro countries such as Spain and the Netherlands.
This is the result of a study by Geraldine Dany-Knedlik and Andrea Papadia from the German Institute for Economic Research (DIW), which is available to the Handelsblatt. Critics have long accused the ECB of setting its inflation target too narrow. The central bank is aiming for an inflation rate of two percent. Before the corona crisis, the euro area was significantly below the rate for years. The target is currently being exceeded.
According to the DIW study, the price increase in the euro area between 2015 and June 2021 would have been 0.29 percentage points higher if the housing costs had been included in full. In Germany it would have been a little more.
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The effect is more pronounced in countries where the proportion of citizens who own their homes is higher. In Spain the price increase would have been 0.68 percentage points higher, in the Netherlands it would have been 0.65 percentage points.
The ECB could have tightened monetary policy
It was the other way around after the financial crisis, when a real estate bubble burst in Spain. In the period from 2011 to 2014, including the cost of owner-occupied residential property, inflation would have been 1.19 percentage points lower than according to the current calculation method. In the Netherlands it would have been 0.7 percentage points lower and in the entire euro area 0.2 percentage points lower – in Germany, however, it would have been 0.06 percentage points higher.
So if housing costs had been taken into account more in the past, the inflation rates from 2011 to 2014 would have been lower – and higher thereafter. In terms of monetary policy, this would have meant that the ECB should have tended to loosen its monetary policy even more in the phase immediately after the financial crisis – and in the time after that it could have tightened it a little.
The fact that the cost of owner-occupied housing has not yet been taken into account in inflation was primarily due to practical reasons. For one thing, houses and apartments are also assets. People not only buy houses to live in, but also to increase their value. However, only consumer prices and not asset prices should be included in the consumer price index.
The ECB’s monetary policy is not intended to control the prices of stocks, bonds or other assets. In addition, real-time values are required for estimating the costs of owner-occupied housing. So far, the data in the euro area has only been collected on a quarterly basis.
In Germany, the Federal Statistical Office makes do with the fact that for those who live in their own house, it applies the net rents that would have been incurred according to the rent index.
However, this approach is not possible in the entire euro area because in some countries such as Spain people hardly ever rent. One possibility for the survey are surveys of households on willingness to pay.
More confidence in the ECB
Another possibility would be the calculation according to the so-called net income concept. The purchase prices of newly built apartments and houses are included in the inflation statistics, but not the prices of existing apartments.
The lack of home ownership in the inflation statistics should explain, among other things, why perceived and actual price increases diverge. Even if the long-term average effect in Germany is low, there are clear differences at certain times.
Taking property costs into account, inflation in June would have been 2.8 percent instead of around two percent. “For the future design of the ECB’s monetary policy, the inclusion of the housing costs of owner-occupied property is important,” says DIW economist Dany-Knedlik. The planned adjustment by the ECB could increase confidence in the central bank because the basis of monetary policy measures would be closer to reality.
More: Why housing costs should soon be included more in inflation