Inflation and Rental Markets: Theory and Evidence from a Rent-Controlled Systemn

Summary

How do rental markets shape inflation? In many countries, new leases follow the market, while ongoing rents rise only with inflation. Longterm tenants therefore pay less than newcomers – a “tenure discount.”
This paper builds a simple model of this two-tier system and tests it with Austrian data (2005–2024). It shows how contract length and indexation rules make rent inflation persistent and how they drive inflation in both the short and long run.

Highlights

Rental institutions drive inflation
A tractable model shows how rental markets shape inflation: new rents track current conditions, while
continuing contracts adjust via indexation rules. The model implies that institutional details (e.g. contract
length, turnover, indexation) matter for aggregate inflation.

Tenure discounts, equal growth
The model yields a closed-form tenure discount – the rent gap between ongoing and new leases.
Despite sluggish indexation, average continuing and new rents grow at the same steady-state rate
via a composition effect, even as continuing rents stay permanently lower in level.

Austrian evidence, 2005–2024
Austrian rental data (2005–2024) – a setting of widespread indexation and long tenures – confirm the
model: geometric contract-duration distribution, sizable tenure discounts, similar long-run growth of continuing and new rents, sluggish adjustment and effects of structural shifts.