Sunday, August 28, 2011

Energy Consumption and Real Estate Prices

Do "green buildings" sell and rent for a price premium?    This LA Times article  discusses some recent research on this topic including my solar paper (joint with Costa, Dastrup and Graff-Zivin).  Using hedonic pricing techniques and data from Sacramento County and San Diego County in California, we find that solar panels increase a home's resale price by roughly 3.5%.   John Quigley and co-authors such as Nils Kok have written several papers  documenting that commercial real estate that is certified as "green" either by LEED or Energy Star sells and rents for a price premium.

The economics of this energy capitalization is pretty straightforward.  Some predictions;

1. If the price of electricity is higher in a local area, then the energy efficiency price premium will be larger.

2. If environmentalists live in such an area (i.e Berkeley), there will be more "green buildings" built.  Whether the price premium will be larger hinges on the shape of the supply curve. If there are many green architects working in liberal/green areas, then the higher demand in such areas may not translate into a price premium (hint: think of a flat supply curve).

3.  Many energy efficiency strategies are hard for a potential buyer to detect.  A potential buyer of a home is unlikely to ask the previous resident for his typical electricity bill. Even if such a nerd requests such a document, family j may learn little about what its energy bills will be from seeing family m living in the same house.   In the absence of "energy labels" for homes that certify its energy efficiency, residential energy efficiency is unlikely to be capitalized into resale values. Holland and Singapore have introduced such ratings systems and Nils Kok and John Quigley have evaluated these.

4. If the price of electricity is high, then new construction will be more energy efficient.  See Costa and Kahn 2011.