Wednesday, October 19, 2011

Housing Inflation in the Euro Periphery

Yesterday I noted the rather mysterious phenomenon that inflation appears to be running higher in the Eurozone periphery than in the core.  Several commenters suggested that perhaps this was due to tax changes.  In order to explore the issue further, I went to this page which gives details of the "HICP" (Harmonized Index of Consumer Prices - essentially the European equivalent of the CPI) for various subcategories of goods and services.  I looked through them all to find cases where inflation is higher in Greece and Spain than in Germany.  It quickly became clear that this is not a general pattern across all categories, but rather is concentrated in Housing, and to a lesser extent transportation.

The graph above shows inflation in housing over the last 12 months for a number of Eurozone countries, and Greece, Spain, Italy, and Portugal are all higher than Germany.  This next graph shows the last 12 months worth of year-on-year changes for just Germany, Greece, and Spain:

It appears that housing has been under price pressure in Greece and Spain for a couple of years.  The housing HICP in Europe excludes owner-occupied housing (as clear from these documents), so this is basically indicating that rental housing is the main source of the recent peripheral inflation.

Why this should be so is still unclear to me.  A quick Google search tends to exclude the tax idea.  Possibilities that occur to me are that many former property owners have been forced into the rental market, or immigration.  However, this wouldn't explain the timing structure of the graph: the highest inflation being over the 12 months ending this spring.  Adding a few more countries reveals this is somewhat Europe-wide except perhaps for Italy where it's later:

And that leads me to this speculation - could the high level of interest rates in the periphery be feeding through into rents and driving up measured inflation?

That's all I have time for today but hopefully I can explore this further tomorrow.


Gary said...

If most of the inflation is largely rents, then one can see why there have been more and more unrest in these countries. This could just be the natural tendency to push problems onto the most vulnerable until they can't take it any longer. If so, it can't last, and perhaps that is what you are seeing in the decrease during the spring.

What is happening with wages? To me, that is the defining property of inflation - that BOTH wages and prices rise. Otherwise its just temporary pain until the costs can no longer be tolerated and demand drops.

IanJ said...

Black market rents ?
If incomes are dropping / taxes rising, owners may be pushing rents affecting the legal rental market (at least I assume black market rents are not in HCPI)

1leone said...

With regards to Italy, there is plenty of vacant property being held back both for sale and rent. At some stage, something will give.

James said...

The Economists publishes data about once per quarter in an effort to illuminate possible housing bubbles around the world. July 2011 data is here:

Interactive tool here:

The interactive tool seems to indicate house prices have been dropping in Spain.

Jos Deuling said...

The Bank of Greece publishes quarterly data on the development of Greek housing market. The figures show that average house prices follow a downward trend since 2009. See the overview on