Study by ZEW and IREBS: Rent Indices Need More Market Proximity and Improved Databases

Germany implements plans to curb soaring rent prices: The rents for apartments let to new tenants must not exceed the standard rent by more than ten per cent. Rent indices thus become a central means of controlling the housing market. The central issue here is that the importance of rent indices is not currently recognised. In addition, the legal basis for the design of rent indices is far from accurate, which frequently leads to legal disputes. The Centre for European Economic Research (ZEW) in Mannheim and the IREBS International Real Estate Business School at the University of Regensburg have carried out a study, which has enabled them to identify the economic requirements a properly functioning rent index must fulfil.

In concrete terms, this means that researchers from ZEW and IREBS have made proposals, which, if implemented, might improve the way in which a qualified rent index should be calculated.

1. Separation of statistics and politics

In a constitutional state, the principle applies that official statistics are calculated by a neutral body. Despite its great importance, the rent index, whose implementation is mostly non-transparent, is largely subject to the convenience of local politicians and stakeholders. As a result, customary rents calculated according to the rent index are significantly lower than they would be if they were determined by actual market conditions. In order to maintain the efficiency of the housing market, the rent index must once again reflect the housing market. Political interference in the calculations of rent indices should no longer be possible. Rental limits desired by politicians should be implemented independently from the calculation of the rent index. In this context, the curbing of the rent price could serve as a role model: the rents for apartments let to new tenants must not exceed the customary rent by more than ten per cent. However, a valid regulation for rent increases would still be missing. The decision to implement an instalment of zero, ten or thirty per cent of the customary rent is entirely down to politicians.

2. Full census instead of interviews

Painstaking work is currently being undertaken to collect data from tenants and landlords. Participation is voluntary. The study shows that the data volume of a representative sample is often insufficient. In addition, there are serious concerns that the surveys are subject to a systematic bias as a result of selective response behaviour. A significantly cheaper and more appropriate way to collect data would be to carry out a full online census of all rental data. The acquisition of data concerning rent increases on current market developments should be abandoned in the future as these are unrelated to current market developments.

3. Extension of the survey period

The current method of calculating the average of data without considering the various years of collection is a clear violation of basic statistical and scientific principals and is clearly inappropriate where the survey period is extended by ten years. If the respective year in which data was collected is taken into account, then an extension of the survey period by ten years or more is no longer objectionable.

For more information please contact

Dr. Oliver Lerbs, Phone +49(0)621/1235-147, E-mail: lerbs@zew.de

Prof. Dr. Steffen Sebastian, University of Regensburg, IREBS International Real Estate Business School, Phone +49(0)173/890 7203, E-mail steffen.sebastian@irebs.de