Alexander Huber
Vienna University of Economics and Business
Sofie R. Waltl
University of Cambridge
Abstract
Inflation-indexed rents pass past inflation into future rents and, because rents enter the CPI, back into measured inflation. We study whether state-contingent rent regulation can weaken this feedback loop, exploiting Austria’s rent brake, under which rents remain fully indexed up to 3% inflation but only half of any excess may be passed on. Using quality-adjusted repeat-observations-panel rent indices constructed from the Austrian Microcensus (2014–2026), we find near-perfect pre-reform co-movement between lagged CPI inflation and rent inflation. After the reform, rent inflation shifts down at any given rate of lagged inflation by 1.3 percentage points for net rent and by 0.8–0.9 for gross rent and total housing costs, and the net-rent level ends up about 4% below its pre-reform counterfactual by mid-2026. Covered contracts closely track the frozen statutory benchmark, and uncovered contracts decelerate just as much, suggesting that restraint spread beyond the contracts the rules covered. ECB Consumer Expectations Survey data show that Austrian renters overwhelmingly attribute expected rent changes to indexation and suggest that they revised their expectations once the brake was enacted, before it took effect. The direct effect on aggregate inflation is modest, at most 0.13 percentage points under observed conditions, but rises under high rent inflation. We argue that high landlord compliance with indexation reflects its verifiability, which the new formula reduces, and that the brake’s automatic relaxation may help emergency rent measures avoid becoming permanent.
JEL Codes: E31; E64; R31; R38; C43; D84.
Keywords: Rent inflation; rent indexation; rent control; state-contingent regulation; inflation persistence; rent expectations; Austria.
