“August 2023 actual rent inflation at 2.8% in annual terms. This was the highest reading since the launch of the euro,” stated the latest economic bulletin from the European Central Bank, co-authored by ECB economists Rodolfo Arioli, Elena Bobeica (on the left), Moreno Roma and Michel Soudan (on the right). Photos: European Central Bank, Montage: Maison Moderne

“August 2023 actual rent inflation at 2.8% in annual terms. This was the highest reading since the launch of the euro,” stated the latest economic bulletin from the European Central Bank, co-authored by ECB economists Rodolfo Arioli, Elena Bobeica (on the left), Moreno Roma and Michel Soudan (on the right). Photos: European Central Bank, Montage: Maison Moderne

Housing rent inflation in the eurozone reached a record high of 2.8% in August 2023, the highest since the euro’s inception, driven by both supply and demand factors, and influenced by regulatory measures, according to the quarterly ECB economic bulletin.

In August 2023, the euro area witnessed a substantial increase in the annual rate of change of the actual rentals for housing, commonly referred to as residential housing rent inflation, which reached 2.8%--a record high since the inception of the euro in 1999.

This figure surpasses the long-term average from 2000 to 2019 by 1.2 percentage points, as reported in the European Central Bank’s quarterly economic bulletin, on 9 November 2023.

ECB economists Rodolfo Arioli, Elena Bobeica, Moreno Roma and Michel Soudan observed variations in rent inflation across the euro area, including Luxembourg. As of August 2023, most member states experienced higher rent inflation rates than the previous year, exceeding long-term averages.

The extent of these changes varied significantly, with some countries like Malta seeing an 18.3% increase, while others like Estonia experienced a 2.0% decrease. They also observed a recent trend of sluggish growth in rents for new contracts across the euro area.

In Luxembourg, housing rent inflation has also been increasing, although it moderated to 1.9% in August, down from the 2.1% observed in May and June 2023.

The team reported that rent changes over time are subject to various methodological and regulatory influences, which dampen their responsiveness to market forces compared to other household consumption components. The economists highlighted several key factors influencing rent adjustments. Rents are typically adjusted no more than annually and rental contracts are often renewed with a backward-looking approach, leading to a slow pace of rental price growth. Additionally, the rent basket, mainly consisting of existing rents, tends to align with market forces, albeit with a delay.

The ECB team said that the factors driving up rent inflation are likely to persist. They identified strong influences from both the supply and demand sides of housing.

On the supply side, they pointed out that rising construction and maintenance costs are diminishing the real-term profitability of property ownership. Simultaneously, tighter financing conditions are constraining the housing supply. Additionally, the quartet reported that in certain countries, the conversion of rental units for short-term tourist accommodations and the influx of foreign workers are exerting additional upward pressure on rents.

On the demand side, the economists found that previous hikes in house prices, combined with increasing financing costs, have led to a decline in housing affordability. This trend is pushing more people towards renting, as owning a home becomes increasingly challenging.

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