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Surging housing costs boosting overall euro zone inflation: ECB

© Reuters. FILE PHOTO: Workers maintain the huge Euro logo in front of the headquarters of the European Central Bank (ECB) in Frankfurt, December 6, 2011. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) – Euro zone housing costs rose sharply last year, boosted by soaring German property prices and adding to already uncomfortably high overall inflation, a European Central Bank study showed on Wednesday.

Housing costs are mostly excluded from headline inflation figures but the ECB promised last year to take this cost into account even before official data can be adjusted to better reflect the actual price changes experienced by households.

While housing costs do not deviate significantly from overall price changes over several decades, they would have added to inflation for most of the past decade and would have lifted inflation in the third quarter of last year by just over 0.3%.

Although inflation is now more than twice the ECB’s 2% target, the bank has kept policy especially loose on the assumption that inflation will fall back below target next year without any action.

It now sees inflation at 3.2% this year, falling to 1.8% in 2023, so even a small boost from house prices could put price growth right at or even above target next year.

GRAPHIC – House price impact on euro zone inflation

“Developments in the last few quarters are mostly explained by the sharp increase in Germany,” the ECB said in an Economic Bulletin article.

“Since 2011, the difference between the euro area Harmonized Index of Consumer Prices with and without Owner Occupied Housing has been limited, with the largest difference being 0.3 percentage points,” the ECB added.

Euro zone inflation rose to a record 5.1% in January, well above expectations, prompting the ECB to abandon its pledge not to raise interest rates this year and to prepare the ground for ending debt buys, the cornerstone of its stimulus policy in recent years.

GRAPHIC – Country by country contribution to euro zone house price growth

While the ECB does not project house price growth for 2023, it argued that the market tends to move with business cycles. That could mean further price rises since the bank sees economic growth at 4.2%, well above historic trends.

“Changes in house prices tend to be more closely linked to business cycles and sometimes also financial market dynamics, with considerable variation around their longer-term average of 3.3%,” the ECB said.

Surging housing costs boosting overall euro zone inflation: ECB

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