V. Rent indices: methodology
Rent indices measure the change in ’pure’ rents for primary residences, i.e., net of house furnishings,
maintenance costs, and utilities. For modern rent indices included in CPIs, data are usually collected
by statistical offices through surveys of housing authorities, landlords, households, or real estate
agents (International Labour Organization et al., 2004).
Rental units are heterogeneous goods.
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Consequently, there are several main challenges involved
when constructing consistent long-run rent indices. First, rent indices may be national or cover
several cities or regions. Second, rent indices may cover different housing types ranging from high
to low value housing, from new to existing dwellings. Third, rental leases are normally agreed to
over longer periods of time. Hence, current rental payments may not reflect the current market rent
but the contract rent, i.e., the rent paid by the renter in the first period after the rental contract has
been negotiated.
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Fourth, if the quality of rental units improve over time, a simple mean or median
of observed rents can be upwardly biased. These issues are similar to those when constructing
house price indices and the same standard approaches can be applied to adjust for quality and
composition changes. For a survey of the different approaches, the reader is referred Knoll et al.
(2017). Yet, as can be seen from the data description that follows, these index construction methods
commonly used for house price indices have less often been applied to rents.
Another important question when it comes to rent indices is the treatment of subsidized and
controlled rents. Rental units may be private or government owned and hence be subject to different
levels of rent controls or subsidies. Since these regulations may apply to a substantial share of the
rental market, rent indices typically cover also subsidized and controlled rents (International Labour
Organization et al., 2004).
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It is worth noting that not properly controlling for substantial changes
in rent regulation may result in a mis-measurement of rent growth rates. More specifically, if the
share of the rental market subject to these regulations suddenly increases—e.g., during wars and in
the immediate post-war years—-the rent index can be downwardly biased.
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An additional challenge when constructing rent indices is the treatment of owner-occupied
housing. Since a significant share of households in advanced economies are owner-occupants, rent
indices typically cover changes in the cost of shelter for both renters and owner-occupiers.
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The
cost for owner-occupied shelter is an estimate of the implicit rent that owner-occupants would
have to pay if they were renting their dwellings. Different approaches to estimate the change
in implicit rents exist, each with advantages and disadvantages. Most statistical offices rely on
the rental equivalent approach.
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The resulting rent index is based on an estimate of how much
owner-occupiers would have to pay to rent their dwellings or would earn from renting their home
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Compared to owner-occupied houses, Gordon and van Goethem (2007) argue that rental units are,
however, less heterogeneous in size at any given time and more homogenous over time. The authors provide
also scattered evidence for the U.S. that rental units experience quality change along fewer dimensions than
owner-occupied units.
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Typically, in times of low or moderate general inflation, the market rent will be higher than the contract
rent. Yet, the introduction of rent controls or a temporary strong increase in the supply of rental units may
result in the market rent being lower than the contract rent (Shimizu et al., 2015).
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Exceptions include, for example, the Canadian rent index where subsidized dwellings are excluded
(Statistics Canada, 2015).
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For example, this has been the case for the Australia CPI rent index after WW2 (see Section W).
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Imputed rents of owner-occupied housing are excluded in Belgium and France. In some countries, two
rent indices are reported, one for renter-occupied and one for owner-occupied dwellings (International Labour
Organization et al., 2004; OECD, 2002).
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The rental equivalent approach is currently used in the U.S., Japan, Denmark, Germany, the Netherlands,
Norway, and Switzerland (OECD, 2002).
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