Why house prices should flow into inflation in the future

The Governing Council wants to include real estate prices in measuring inflation. How much is that driving the inflation rate?

House prices continue to rise despite Corona.

AAt the closed meeting of the Governing Council, the highest body of the European Central Bank, there was apparently a far-reaching agreement last weekend: The central bankers want to include the prices for owner-occupied residential property in the inflation rate. That penetrated the body to the outside. In contrast to America, for example, house prices in the euro zone have so far not been included in the Harmonized Index of Consumer Prices (HICP), which the ECB uses for its monetary policy, among other things. Only the rents are represented there. Critics had long called for a change.

The idea that the official inflation rate in the euro zone is distorted downwards simply by the way it is measured is very widespread in Germany in particular. In any case, at a public hearing by the Bundesbank of citizens and interest representatives last year, the inclusion of house prices in the calculation of the inflation rate was a requirement that was mentioned relatively often. The Federal Government also supported these efforts, as Secretary of State for Economic Affairs Ulrich Nussbaum explained.

Real estate prices continue to rise despite Corona

In times when real estate prices are rising significantly faster than the general price level, as in previous years, the inclusion of house prices is likely to cause the inflation rate to be higher – albeit not dramatically. Bundesbank President Jens Weidmann estimates the inflation rate in the eurozone to be 0.2 to 0.3 percentage points higher every quarter. In the longer term, on the other hand, over phases with stronger and weaker increases in real estate prices, the effect would be rather small.

Image: FAZ

When asked, the economist Volker Wieland praised the plans to include owner-occupied residential property in the inflation rate as a correct step. Whether there is an effect, however, depends heavily on the details.

In terms of the statistical system, the changeover is not entirely straightforward. In addition, the ECB does not collect the data itself; it is supplied by the Eurostat statistics agency. However, it seems difficult to imagine that the statistics authority would refuse to provide the requested data when the ECB orders it. However, Eurostat points out that the authority cannot decide on its own how to calculate its Harmonized Index of Consumer Prices: “The inclusion of owner-occupied housing in the HICP would require an amendment to Regulation 2016/792, which only the European Council and the Parliament can adopt can decide, ”said a Eurostat spokeswoman.

Not much has been heard of political reservations, but the process could take some time. Only trade union circles once suggested that rents should be weighted more heavily in the index instead of including the condominiums of wealthier citizens in the consumer price statistics.

Statisticians had also pointed out systematic difficulties. On the one hand, you have to be able to calculate the cost of owner-occupied residential property and separate it from the increase in real estate assets. On the other hand, real estate prices need real-time values, which have only been collected on a quarterly basis so far.

Image: FAZ

The plans for this measurement change come in times of rising inflation rates and rising house prices. The ECB published a report this week according to which real estate prices in the euro zone continued to rise sharply despite Corona. In the fourth quarter of 2020, the year-on-year price increase averaged 5.8 percent in the euro zone – the highest rate of increase since mid-2007. Germany, France and the Netherlands were responsible for almost three quarters of the total increase in Europe. “In the case of Germany, the positive contribution to house prices in the euro area began in mid-2010, which also reflects catching up after a period of subdued house price developments,” writes ECB economist Moreno Roma.

The inflation rate in the euro zone rose to 2 percent in May, and in Germany to 2.5 percent. Above all, but not only, energy prices were responsible for this. In the United States, where the inflation rate climbed to a whopping 5 percent in May, house prices also rose sharply. According to figures from the National Association of Realtors, the average price for a house in America rose to a record high of $ 350,300 in May – a year-on-year price increase of as much as 23.6 percent.