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. 

3 comments :

Climate said...

Definitely green buildings are the future. In China many companies from the UK are helping the country develop 130 eco cities in a framework of 20 years!
Keep the good work up, we like you blog and would like to invite you to the environment/carbon dialogue in our fb page.
www.facebook.com/cliamteaction

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Handyman360 said...

Burning Down the House

The word "green" has no useful meaning.

If you could buy a home that used 1/10 the energy of a typical energy star rated house, had a utility bill to match (or less)and is both cleaner, quieter and more comfortable than a typical home....would you pay a premium for that home? What if the same home could be had for the same price as a typical energy star home?

What would you call such a house? Green and EnergyStar are marketing gimmicks and have no rigorous meaning.

My home in Portsmouth borrows from the German Passive House standard and almost meets the rigorous energy standard required to earn that label.

It is now possible to build such a home using standard building materials, local contractors and slightly modified construction practices that can be easily mastered.

The question is not, "Would you pay more for a green house?" but "Why would you pay top dollar for house that cost 1000s of $$$$ per year to heat and cool!"