The rental index has become one of the most important tools to control the housing market. It is used to determine the local reference rent – which in turn serves as benchmark for the rent control scheme commonly referred to as “rent freeze.” In many cities, the rental index more or less dictates local rent levels. This is extremely problematic in the sense that the index arguably fails to live up to its significance. According to a survey conducted by the ZEW Centre for European Economic Research and the IREBS International Real Estate Business School, rental indices do not reflect the true market level today. Unwilling to leave it at that, the experts actually suggested ways to compile a scientifically accurate rental index. Implementing their recommendations would help rental indices to map much more realistic headline rents.
Rental Indices out of Touch with the Market
Under current law, the compilation of a qualified rental index has to satisfy scientific principles. This is precisely not the case, according to the survey. Many so-called qualified rental indices lack in transparency in regard to data collection, data processing and public disclosure of the calculated outcomes. Moreover, they are not calculated by an independent entity like other official stats, but are frequently the product of wilful manipulation by local politicians and interest groups. As a result, rental indices often report considerably lower reference rents than the actual market level would require. The experts therefore call for a clear separation of politics from statistics. Going forward, the compilation of rental indices should be free from any political interference. Whenever rent caps become politically desirable, they should be calculated separately, or so the experts argued.
Current Calculations Based on Insufficient Data Basis
Another issue is the quantity of data analysed. In the opinion of the experts, the data universe currently used to calculate a qualified rental index is much too small. A far more sensible approach would be to conduct an internet-based survey of all letting data that would take economic aspects into account, too. Moreover, rent increases and stepped rents should not be included in the calculation any longer since they fail to reflect recent market events. Finally, the experts recommended that – unlike now – any difference in the age of the data be factored in. Scientifically and statistically speaking, there is actually no other way to compile a survey that extends over ten years or more.