Calculation of Rent Indexes Has Room for Improvement

Due to the imminent introduction of a legal cap on rental prices for new lettings, indices on local reference rents ("Mietspiegel") will become central means of control in the German housing market. This will unfold immediate effects on landlords and tenants. Consequently, the German government intends to amend the legal regulations relevant to the calculation of what is known as the qualified rent index. This index is assumed to reflect the level of local reference rents and must be constructed on the basis of scientific principles. The existing legal regulations demand application of scientific principles when constructing the rent index, but they do not yet substantiate any legally binding standards for concrete scientific practices and methodological techniques.

In a study carried out by the Mannheim Centre for European Economic Research (ZEW) and the University of Regensburg, which will soon be released, researchers delineate the requirements for a fully operational rent index from ascientific perspective and developrecommendations on how to improve rent index regulation. Against the backdrop of the recent verdict by the Charlottenburg District Court, namely that the methods used to determine the Berlin rent index have hitherto failed to comply with scientific principles, we would like to point out some of the central findings of the study ahead of full publication.

1. Tenants' associations are currently suggesting that the period permitted by law for which rent payments are utilisedto calculate the local reference rent be extended from the current four to ten years. Such an increase in the database is acceptable and complies with scientific principles usually applied in studies that are carried out to determine pricing in housing markets. However, appropriate statistical weight must be allocated to the various time periods in which rent payments are made; otherwise, this constitutes a clear violation of fundamental scientific principles since an essential factor in determining rent prices would not be taken into account.
2. The majority of specified "qualified" rent indexes ultimately fail to meet common scientific requirements regarding transparency during data collection, handling and processing, as well as during the release of calculation results. These conditions must, however, be satisfied if a transparent comparison of rental prices is to be achieved.
3. The sample size used for the calculation rent indexes specified as "qualified" is often too small to be considered representative. Moreover, a number of concerns arise with regard to systematic biases during the data collection process. One issue, for example, is the selective behaviour of participants when it comes to responding in surveys amongst tenants and landlords. Against the background of strong market intervention by the government by the means of a rental price cap, and the subsequent impact on tenants and landlords, the calculation of qualified rent indexes should instead take into account information on the whole population of local rental properties. This becomes feasible once the provision of necessary rental data becomes legally binding. Meanwhile,rent increases in existing contracts should not be incorporated in the calculation of indices that reflect reference rents.

The complete study will be published in June 2015. If you would like to find out more, we will arrange for a copy to be sent to you upon its availability. To request a copy, please send an e-mail to: grittmann@zew.de

For further 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), Phone +49(0)173 890 7203, E-mail steffen.sebastian@ur.de