House and rental prices are a crucial part of the inflation story in CEE

We have considered the inflation crisis more than once in recent weeks – here and here, for example – because inflation rates are even higher in CEE than they are in the rest of Europe.

There is one important element of the story that we haven’t considered, though: house and rental prices. In both cases, to understand the situation properly, it’s necessary to look at two things: how prices rose in the years leading up to the pandemic, and what has happened since then.

Let’s start with house prices. The House Price Index takes 2015 prices as a benchmark (2015 = 100) and tracks average prices on a monthly basis. At the point the pandemic hit Europe, of the top 10 countries in the EU where house prices had increased most significantly over the previous five years, six were in CEE, including the top three countries on the list: Estonia, where house prices had more than doubled since 2015, Hungary (+90%) and Latvia (+81%):

So that was the context going into Covid. Since the start of the pandemic, house prices have continued to increase steeply in all three of those countries – particularly in Hungary (+40.4%) and Estonia (+39.3%) – but they have risen even faster in the Czech Republic and Lithuania, where house prices are up 46.7% and 41.3% respectively since the start of 2020, much higher than the rate of inflation for consumer goods:

Given overall inflation rates across this region, you might also expect rents to have risen sharply across CEE since the start of the pandemic – and that’s exactly what has happened, but the rates of increase don’t exactly mirror house prices, nor do they correlate perfectly with inflation:

Still, the bottom line is that tenants in CEE are suffering to an even greater extent than they are in Western Europe: of the 10 countries where average rents have increased most steeply since the start of the pandemic, nine are in CEE.

The concern is that, if the forecasts for inflation are correct and it does indeed take longer to bring under control than the rest of Europe, this problem is likely to get worse before it gets better.