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Residential tenants may this year see rent hikes outgrow income hikes. Fair or unfair?

residential rents

The upcoming adjustments of residential rents subject to movements in the net price index (NPI) have been a topic of recent debate. The next rent indexation is expected to up rents at a much steeper rate than previously seen because of high inflation in society at large. Most recently, a political majority in the Danish Parliament agreed to introduce a temporary 4% limit on annual rent hikes over the next two-year period. This on the grounds that it would be unfair to allow rent hikes in line with general price increases in society in view of the high inflation rate right now, with the NPI having increased by 9.1% between August 2021 and August 2022.

However, the situation needs to be put into a more long-term perspective.

Tenants’ income levels have consistently outgrown NPI in 2016-2021
In Figure 1, we compare NPI trends with the disposable income growth of families living in private rental accommodation.

Every single year since 2015, when the Danish Rent Act introduced the possibility of NPI-linked rent adjustments, incidentally at the request of tenant organisations, have tenants’ disposable incomes (blue columns) generally seen a steeper increase than NPI (yellow columns). This applies to all income brackets, whether we look at low-income tenants (lower quartile), mid-income tenants (median) or high-income tenants (upper quartile).

Broadly speaking, due to rent indexation, rents have year after year been seen to take up a smaller share of disposable incomes when it comes to tenants living in private residential rental accommodation subject to NPI-linked rent adjustments. 2022 may well be the first year to break the trend.

This year’s NPI increase will eclipse most tenants’ income growth rates
The trend becomes even clearer when indexing based on 2015. We have done so in Figure 2, in which we compare the NPI trend with the disposable income growth of families living in private residential rental accommodation. The widening gap between the graphs depicting disposable incomes and the net price index up until 2021 reflects the overall improvement of tenants’ private finances on account of NPI-linked rent adjustments. 

As landlord costs for property operations are determined partly by ordinary wage growth, however, landlords have seen their operating costs rise at a steeper rate than rental growth.

So far, data are not available for the movements in disposable incomes in 2021-2022 and NPI in 2022. The broken graph sequences indicate trend forecasts to simulate a realistic scenario. If landlords decide to carry out rent adjustments corresponding to movements in the net price index, many tenants are likely forced to allocate a larger share of their income to rent payments for the first time in years. In Figure 2, this is illustrated by the convergence of the graphs showing disposable income and NPI in 2022, respectively.

Tenant organisations wanted NPI-linked rent adjustments – as long as tenants stood to gain
In Denmark, the Tenants National Organization (Lejernes Landsorganisation LLO) has proposed a temporary suspension of rent indexation as they consider the anticipated rent increases to be unfair. The Danish Social Democratic government, The Green Left (formerly known as Socialist People’s Party), The Danish Social Liberal Party (Danish: Radikale Venstre) and The Red-Green Alliance (Danish: Enhedslisten) have accommodated this proposal by agreeing to the introduction of a temporary 4% limit on annual rent hikes over the next two-year period.

In this context, you could argue that the matter needs to be put into a wider perspective: Up until 1 July 2015, landlords and tenants were free to agree that the rent was to increase annually by a fixed amount, the so-called stair-stepped rent. The advantage of stair-stepped rent was the predictability of future rent developments.

As the parties often agreed annual rates of increase that exceeded the very low inflation rates at the time, tenant organisations requested that the rent be subject to NPI-linked adjustments, just like prices in so many other contracts. In this way, the certainty of stair-stepped rent was replaced by a variable rent adjustment regime that tracks general price movements in society.

As both figures show, NPI-linked rent adjustments have up until this year consistently favoured tenants since they were introduced.

It is therefore fair to ask if it is reasonable to suspend rent adjustments driven by the net price index on the grounds that the potential rent increases in a single year are unfavourable to tenants.

Rent adjustments are driven by price movements in society. The best method to reduce rent increases is therefore to rein in inflation using monetary policy measures, not by an ad hoc suspension of agreed contractual terms and conditions.  

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