The value of domestic building energy efficiency — evidence from Ireland
Introduction
Buildings, in particular homes, account for a significant proportion of emissions in developed economies. In the EU, residential emissions account for roughly one sixth of emissions (European Commission, 2011), while in the US, buildings accounted for 41% of all energy consumption in 2010, up from 33% in 1980, with residential buildings alone accounting for 22.5% (Department of Energy, U.S., 2012).
In order to limit the extent of global warming to 2 °C, world leaders have endorsed proposals in the Copenhagen and the Cancun Agreements for developed economies to drastically reduce their emissions. For example, the European Union aims to reduce greenhouse gas emissions by 80–95% by 2050. The European Commission believes that the key to achieving this reduction will be increased energy efficiency, estimating that by 2050 built environment emissions could be 90% lower (ibid.).
However, upgrading a home to improve its energy efficiency could, depending on the property, involve a significant financial investment. Likewise, new properties being built to high standards of efficiency are likely to have higher input costs. Therefore, an important question to ask is: are potential renters or buyers willing to pay for this increased energy efficiency, and if so how much? Furthermore, as property purchasers are likely to reap the rewards of owning an energy efficient home for longer than renters, is there a difference in the premium purchasers and renters are willing to pay? And does this willingness to pay extra vary by market conditions?
In this paper we examine the effect of the Irish system of energy efficiency ratings on house prices and rental rates, using an extensive dataset of property listings from 2008 to 2012. A Building Energy Rating (BER) is an objective measurement of the energy efficiency of a building. Homes which have been assessed are given a rating from A1 to G (where A1 is the most efficient) on the basis of the efficiency of the space and water heating, ventilation, insulation and lighting fixtures in the building. A higher efficiency rating for a home is expected to translate to lower energy bills. However, Sustainable Energy Authority of Ireland (2010) note that the BER is only indicative of energy usage, and that actual energy usage will be dependent upon the behaviour of household members; thus, they state, it is similar to a miles per gallon rating for a car. As well as the energy efficiency of a building, a BER certificate also reports the carbon dioxide emissions associated with the building (expressed as kgCO₂/m2/year) (SEAI).
BER certificates were adopted in Ireland following the passing of the EU Directive on the Energy Performance of Buildings into Irish law in 2006. The Sustainable Energy Authority of Ireland (SEAI) was designated as the issuing authority for BER certificates in Ireland. As of January 1st 2007, if planning permission is sought for a new dwelling, a BER certificate is compulsory and, as of January 1st 2009, any existing home offered for sale or for rental must have a BER certificate. In 2013, new legislation (the Recast Energy Performance of Buildings Directive) will ensure that when properties are offered for sale or to let, provided the property has a BER certificate, the energy rating must be stated in the advertisement (The European Parliament the Council of the European Union, 2010). As per the Energy Performance of Buildings Directive, certain buildings are exempt from the BER legislation.1 A fine of up to €5000 can be levied for non-compliance with the legislation (European Communities, 2006).
The BER assessment can be carried out by any assessor who has been certified by the SEAI, and the charge per assessment depends upon the assessor but, on average, ranges between €109 and €250 depending on the size of the building (from various assessor websites). Once a BER assessment has been carried out, the BER certificate is valid for 10 years, provided that no significant change is made to the building within that time (Sustainable Energy Authority of Ireland, 2010). Any building which is being let or sold on the basis of plans must have a provisional BER certificate, which is valid for a maximum of two years.
There is a small existing literature on this subject, principally based on the commercial property sector, almost all of which find a positive effect of energy ratings on property prices and rental rates, although there is no consensus yet on the scale of the effect. The literature on residential energy ratings is much smaller, although studies from the Netherlands, Australia and China all find a positive effect.
The contribution of this paper is threefold. Firstly, it is the first paper to examine Ireland's BER system and the impact it has on property valuations. Secondly, it is the first paper that we know of which examines the extent to which there is a residential lettings premium, and thus it is also the first to compare across residential sales and lettings segments. In this sense, it is the residential market equivalent of Eichholtz et al. (2010). Lastly, it is the first paper to examine whether there are structural variations in the house price premium associated with greater energy efficiency, including between urban and rural markets, between large and small properties and in different periods with different market conditions.
The rest of the paper is structured as follows: Section 2 contains a review of the relevant literature, Section 3 outlines the methodology, Section 4 describes the data, Section 5 presents the results and, finally, Section 6 concludes.
Section snippets
Previous research
Early literature on the effects of energy efficiency in the real estate market dates back to Gilmer (1989) and Dinan and Miranowski (1989) who found positive impacts of energy labels and energy-efficiency improvements. More recently Banfi et al. (2008) examined households' willingness-to-pay for more energy efficient buildings in Switzerland. The results show that respondents are willing to pay approximately 8% for improved ventilation, and 6–7% for façade insulation. However, householders were
Methodology
Hedonic regression techniques are commonly used to estimate the value of individual attributes of a property whose prices are not directly observed. As outlined by Rosen (1974), hedonic prices are revealed by the observed price of the house and the attributes associated with it. The implicit prices of the characteristics are estimated by regressing the observed price of a house on its attributes (such as size, number of bedrooms/bathrooms, location).
As Rosen (1974) explains, in the hedonic
Data employed
According to the Sustainable Energy Authority of Ireland, the body responsible for energy certificates in Ireland, in early 2012 there were 269,843 properties in Ireland with a BER certificate. With preliminary results from the 2011 census indicating 2,004,175 houses in Ireland, this means that approximately 13% of the total housing stock has a BER certificate. It is a subset of these properties, i.e. those offered for sale or rental on daft.ie, which we are using in our analysis of the
Modelling the decision to advertise a BER
The first stage of the Heckman model is the selection equation which models the decision to advertise a BER when listing a property for sale or rental. There are four principal results, which are broadly consistent across sales and lettings segments: time matters (later being more likely to have a BER), size matters (larger is more likely) and location matters (in general, more urban areas are more likely to have a BER) – but a property's type, perhaps surprisingly, does not matter.
The results
Conclusions
According to the SEAI, energy efficiency certificates will “allow buyers and tenants to take energy performance into consideration in their decision to purchase or rent a home” (SEAI, from FAQs on BER certificates); in this paper we have confirmed that buyers and tenants do place a positive and significant value on increased energy efficiency. We have provided the first set of estimates for Ireland of the value of increased energy efficiency in the residential sector. Based on previous research
Acknowledgements
We are grateful for the funding from the EPA Strive programme and the ESRI Energy Policy Research Centre. Helpful comments were received from the participants at the 2012 ESRI Environmental Economics Seminar and the ESRI UCC Energy Modelling Research Seminar. The usual disclaimer applies.
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