WHAT IS THE RENTAL PRICE INDEX BY SVOBODA & WILLIAMS + VŠE?
The Rental Price Index by S&W + VŠE is an analytical tool that monitors the growth of rental prices in the premium segment in Prague developed by the Svoboda & Williams real estate agency in cooperation with the Faculty of Informatics and Statistics of the University of Economics in Prague. The data is sourced from the actually achieved rents of the apartments that were listed by Svoboda & Williams. Annually, it amounts to 1,200 properties in the territory of Prague 1–10 with studio to 5-bedroom layouts. Since the properties exhibit a high level heterogeneity, we apply an aggregate price index to the development of their prices. It works just like the Consumer Price Index maintained by the Czech Statistical Office, which measures inflation.
WHY SIMPLY COMPARING THE AVERAGE PRICE DEVELOPMENT IS NOT ENOUGH?
The development of average rental prices doesn’t correctly reflect the actual change in prices. This is because the average rent is influenced not only by fluctuations in prices, but also by a changed product structure. Let’s give an example. In two monitored periods, a sample of apartments including luxury apartments in the center of Prague and cheaper apartments in the broader center have been rented. The prices of both the cheaper and the luxury apartments in the second period remain equal, but more of the expensive units have been rented. This will raise average rents, but the price index will remain the same. The aggregate price index is based on the assumption of the fixed presence of rental segments in the portfolio and therefore reflects the change in price, which is “cleaned” of the change in the rental structure. The index is calculated as a weighted average of the price changes in the individual segments, where the weights are their representation in the portfolio (structure) in the selected fixed period.
CONSTRUCTION OF THE RENTAL PRICE INDEX BY SVOBODA & WILLIAMS + VŠE
Selection of segments
The segmentation made sure that the apartments in the same group were as similar as possible and, on the other hand, that the groups were as different as possible. At the same time, each group had to contain a sufficient amount of data. Within the statistical analysis, the impact of many factors on rental prices was examined. These parameters included the specific layout of an apartment, its location, floor, and whether it came with a terrace, balcony, or loggia, or the option to rent a parking space. The analysis proved that rents were most affected by the location and layout of the apartment, and therefore we performed the segmentation based on these two factors.
Based on our expertise and the data analysis of rental prices, we divided Prague into three locations—the center, the wider center, and the rest of Prague (see map above).
Apartment layouts were chosen as the second factor. Based on the location and the layout we defined 9 segments in total:
SELECTION OF WEIGHTS
We assigned weights to the individual segments on the basis of the structure of the apartments rented during the calendar year of 2016. The weight of a segment in the price index is calculated as a proportion of the total rent in the relevant segment to the total rent for all segments brokered in 2016.
The index is compiled on a biannual basis to ensure that a sufficient number of observations could be made. In practice, biannual indexes aren’t as common as monthly or quarterly indexes, but they’re by no means exceptional. For example, the United States Department of Labor uses one to construct the consumer price index.
WE CALCULATE TWO KINDS OF INDEXES
A year-on-year index – monitors the rental price changes between the current half-year period and the previous half-year period (e.g. H2 2023 vs. H1 2023)
A base index – monitors the rental price changes between the current and the so-called base period. A stable period considered a long-term “normal” default should be selected as a base period, in our case H1 2015.
