Much is currently being written about the Q3 edition of the German Financing Index (DIFI). Concise phrases such as “Real estate market on the upswing – Lenders leave the valley of tears” and “Sentiment among real estate financiers is positive again” are used. This is welcome news – but caution, the index is often misinterpreted:
The index is not a sentiment barometer intended to measure how good or bad the mood is within the surveyed group of 27 experts. It only indicates whether the sentiment in the surveyed group has improved or worsened.
Analogous to a meteorological barometer, the DIFI thus observes 27 barometers and records what percentage of them have improved or worsened. If 9 barometer readings have improved and 18 have worsened, the index balances 33.3% improvement and 66.7% worsening, resulting in an index value of -33.3.
However, this does not indicate whether the barometers (individually and on average) are currently showing low pressure or high pressure. Such a status cannot be constructed from the time series by adding the index values, because only the direction, but not the extent of the change, is known. For example, in the case above, the 9 barometers might have improved by ten units each, while the 18 only worsened by one unit each. On balance, the measured value would then have improved by 90-18 = 72 units, even though 2/3 of the barometers worsened and the index value therefore shows a negative value of -33.3.
The construction of the DIFI Index has advantages because it avoids notorious problems: it is difficult for respondents to robustly classify their sentiment on a scale over time. The statement of whether one feels better, worse, or the same as three months ago is much simpler. Therefore, the creators of the index probably opted for a less informative but more reliably measurable quantity. The ‘real’ sentiment barometers from BF.Direkt and VDP, as well as individual mortgage banks, do this differently. In my opinion, it would be good if the specific nature of the index were more clearly highlighted in the DIFI Report.
Prof. Dr. Lutz Johanning (WHU – Otto Beisheim School of Management)