Overcoming the Split Incentive Barrier in the Rental Housing Market: Germany s Approach of Green premiums in Rent Regulation Martin Vaché, IWU Page 1
Funded by the European Union Overcoming the Split Incentive Barrier in the Rental Housing Market: Germany s Approach of Green premiums in Rent Regulation Martin Vaché Institute for Housing and Environment, Darmstadt Page 2
Agenda 1. Scope 2. Rent regulation in Germany s market based rental housing sector 3. Empirical rent surveys as legal instruments 4. Green premiums: empirical evidence in rent surveys 5. Known issues and how to overcome them 6. Conclusion Page 3
Scope! Rent regula+on as policy instrument for overcoming split incen+ves?! A short explana+on of the rent ceiling system in Germany! Presenta+on of the empirical instruments used for legal issues! Presenta+on of the state of empirical evidence of Green premiums in legal rent surveys! Discussion of known issues and how to overcome them Page 4
Rent Regulation 1. Scope 2. Rent regulation in Germany s market based rental housing sector 3. Empirical rent surveys as legal instruments 4. Green premiums: empirical evidence in rent surveys 5. Known issues and how to overcome them 6. Conclusion Page 5
Rent Regulation! Could rent regula+on be a policy instrument for overcoming split incen+ves? Page 6
Rent Regulation! 558 (2) BGB : Die ortsübliche Vergleichsmiete wird gebildet aus den üblichen Entgelten, die in der Gemeinde oder einer vergleichbaren Gemeinde für Wohnraum vergleichbarer Art, Größe, Ausstattung, Beschaffenheit und Lage einschließlich der energetischen Ausstattung und Beschaffenheit in den letzten vier Jahren vereinbart oder ( ) geändert worden sind. 558 (2) Civil code: The usual comparable rent will be formed out the typical payments for rental housing of the same type, size, facilities, properties and location, including energy related facilities and properties, in the same municipality (or any comparable), that have been agreed on or ( ) that have been changed within the last four years. Page 7
Rent Regulation! No fixed ceiling, but unilateral rent increases possible up to a comparable rent level! Comparability within the same property type: rent as a function of 5 property features! Time frame: Last 4 years newly agreed or renewed contract rents! Rents are contract rents by definition, no market rents. Why?! Smooting: contract rents are sluggish, while market rents are more volatile! Contract rents are sticky: they provide a better approximation of the net expected rental cash flow over time Page 8
Rent Surveys! The civil code does not provide a definition of comparability! Case law history states: one value within a reasonable range of rents! The mean or an interval around the mean of a set of rents! Practical approach! 5-10 comparable houses rents! Expert appraisal! Single housing market (random sample) survey (Mietspiegel): Preferred method in case of legal disputes Page 9
Rent Regulation! Imagine a set of comparable apartments! Take a sample of rents aggreed on during the last 4 years Survey reference date Page 10
Rent Regulation! This would be the mean annual rent level Survey reference date Page 11
Rent Regulation! but 4-years moving averages reduce volatility! The MA-rent at the survey reference date is your comparable rent level Survey reference date Page 12
Rent Regulation! 4-years moving average establishes forward looking rent ceiling Survey reference date > > Page 13
Rent Regulation 1. Scope 2. Rent regulation in Germany s market based rental housing sector 3. Empirical rent surveys as legal instruments 4. Green premiums: empirical evidence in rent surveys 5. Known issues and how to overcome them 6. Conclusion Page 14
Rent Surveys! How to deal with heterogeneous properties of apartments?! Traditional approach: bivariate/trivariate tabulation with classified features (more robust methodology)! Introduced by IWU in the early 90 s: Regression model with hedonic price vectors for quality features (best for pricing heterogeneous goods, but not very stable)! How to measure properties of apartments?! Questionaire with >100/1000 items! Problem with energy efficiency: EPCs not mandatory in the rental market before 2015.! First attempt to measure energy efficiency in hedonic rent tables by IWU in 2001 (issuing of demand based EPCs in the survey)! Auxiliary approach up to date: use construction items as proxies (eg. wall insulation) and calculate some aggregate variable Page 15
Rent surveys! Usual way of listing: Mean rent by size or mean rent by size and age category table Page 16
Rent surveys! Hedonic shadow prices for specific features will be listed as premiums or discounts from the average mean rent level Mietspiegel Frankfurt 2012: Discount for sub standard heating Mietspiegel Frankfurt 2014: Premium for energy efficient window technology Page 17
Empirical Evidence 1. Scope 2. Rent regulation in Germany s market based rental housing sector 3. Empirical rent surveys as legal instruments 4. Green premiums: empirical evidence in rent surveys 5. Known issues and how to overcome them 6. Conclusion Page 18
Empirical Evidence! Results from a meta survey (N=37) mean rent non refurbished, 60m², built 1955 energy efficiency premium non energy related modernisati on premium Valid N 37 37 34 Mean 5,48 0,44 0,71 Std. 0,97 0,3 0,66 10 4,28 0,13 0,12 Quantiles 50 5,28 0,41 0,5 90 7,05 0,9 1,76 Page 19
Empirical Evidence! Results from a meta survey (N=37) Page 20
Known Issues 1. Scope 2. Rent regulation in Germany s market based rental housing sector 3. Empirical rent surveys as legal instruments 4. Green premiums: empirical evidence in rent surveys 5. Known issues and how to overcome them 6. Conclusion Page 21
Known Issues! Results: empirical evidence on rent premiums is available, but! Lower than expected and/or lower than in market rent based studies! Poor stability/ poor significance level! Problem set 1: Energy performance measurement! EPC rating availability still poor (<10% within household surveys, <50% within landlord surveys)! poor EPC quality - Consumption based EPCs: endogenize rebound effects -> bias - Demand based EPCs: tend to overstate energy demand differentials - Poor knowledge about modernization in surveys! Problem set 2: Empirical issues! Uncontrolled heterogeneity in the sample (landlord, submarkets) may lead to biased results! Distorted DGP: willingness to pay is subject to contract negotiation, but some 50% of sampled rents are unilateral renewals Page 22
Conclusion 1. Scope 2. Rent regulation in Germany s market based rental housing sector 3. Empirical rent surveys as legal instruments 4. Green premiums: empirical evidence in rent surveys 5. Known issues and how to overcome them 6. Conclusion Page 23
Conclusion! Good principle of a market based self regulating legal framework! Trade-off between robustness and precision unsolvable, but - Legal framework could be improved (only new rental contracts, larger samples) - Court decisions often lack basic knowledge of empirics! Rent premium puzzle remains unsolved! Market incentive is not sufficient: WTP < savings < investment costs! Why? - Market failure/risk aversion: - non monetary advantages might be underpriced - WTP does not reflect true savings (rebound effects) - Empirical problems (sample size omitted variable bias etc.) Page 24
Conclusion! Advantages compared with market/offer rent studies from an empirical point of view! Better identification of causal effect due to a broad hedonic variable set! Single market survey: Better control of unobserved market specific issues! Disadvantages! Single market survey - Small sample sizes (1.000 to 3.500) - Poor comparability with other surveys! Very complex survey with infinite complex variable aggregation possibilities! Only larger cities available Page 25
Conclusion! The introduction of Green rent premiums in the German Rent control system is not intended to be an incentive for modernisation in the first hand.! It is an instrument for the reduction of disincentives! Page 26
Thank you very much for your attention! Martin Vaché Contact: m.vache@iwu.de Page 27