Do Energy Efficiency Labels Increase Home Prices?

Modern houseAccording to a recent research study, “Energy Performance Certificates - Informing the Informed or the Indifferent?,” the presence of an energy label on homes does not have any significant impact on home pricing. A team led by Professor Jon Olaf Olaussen from the business school at the Norwegian University of Science and Technology said factors such as the location, landscaping, neighborhood and size of the property take precedence in home purchases.

However, this research contradicts several studies that have shown there is a price premium associated with energy labels. A 2010 study by Dirk Brounen and Nils Kok, “On the Economics of Energy Labels in the Housing Market,” showed that houses that had an energy rating of Grade A in the Netherlands had a price premium of up to 10 percent. The authors are two business professors who are respectively from Erasmus University and Maastricht University.

In a 2012 report titled “The Value of Green Labels in the California Housing Market,” Nils Kok and Matthew Kahn found that green buildings attained price premiums of up to 9 percent. Kahn is a professor at the University of California-Los Angeles.

Studies in Australia, Great Britain, and Japan have shown similar trends.

Why Does this Contradiction Exist?

According to Olaussen’s team, the difference in results can be traced back to the design of the research.

Past researchers employed the conventional approach of hedonic regression without considering the time variable. In their approach, the team undertook hedonic regressions before and after the introduction of the energy label. This was followed by the fixed-effect model in which time-invariant variables such as physical location, aesthetic appearance, and dwelling size and type were controlled for.

Investopedia defines hedonic regression as “a revealed-preference method used in economics to determine the relative importance of the variables which affect the price of a good or service.”

The hedonic regressions show some relationship between energy labels and the price premiums. However, the fixed-effect model indicates that there is no relationship between the observed price premiums and the energy labels.

According to the team, “the price premium captures something else rather than the energy label itself.” This contradicts the long-held viewpoint that energy labels have a direct effect on house prices. In the researchers’ opinion, imperfect information could be the driver for the price premium other than the energy label. “Imperfect information” exists when the buyer and the seller have differing prior information on energy efficiency before the energy label.

Based on these results, aesthetic appearance seems to have a direct correlation with the energy labels and may have a positive impact on the price.

The significance of energy efficiency labels in the residential market, however, may vary from country to country.

Older houseHow Do the European Union and the United States Handle Energy Efficiency Labeling?

Energy efficiency for residential buildings in the European Union is mainly guided by the Energy Performance of Buildings Directive (EPBD) which was adopted in 2002. With the intent of promoting transparency, EPBD adopted the Energy Performance Certifications (EPCs) in 2009.

The EPCs are intended to provide reliable information to tenants and buyers about the energy performance of buildings at affordable costs and at the appropriate time. The EPCs have ratings between A and G. The grade A rating indicates the most energy-efficient building while G indicates the least energy-efficient building.

In the United Kingdom, in addition to the EPCs, energy efficiency labelling is done using Building Research Establishment Environmental Assessment Method (BREAM). This looks into the sustainability of the whole house and covers components such as air pollution, energy consumption, water usage, transportation patterns, material flow, and other considerations.

In the United States, the Environmental Protection Agency’s (EPA) Energy Star Program and the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) program have been at the center of promoting energy efficiency for buildings.

The United States uses the Home Energy Rating System (HERS) index, a comparative label. The scale ranges between 0 and 150, with 0 indicating the greatest efficiency and 150 indicating the least efficiency. The New Standard Home that is used as the basis of comparison is rated at 100.

The LEED standard, like the BREAM one, evaluates energy consumption, water management, and indoor environments.

In both the European Union and the United States, different states and countries have adopted different mandates and programs to promote energy efficiency.

What Are the Challenges of Implementing Energy Labels?

While there is recognition that the energy labels can help address information asymmetry, their implementation has not been smooth. Information asymmetry happens when parties involved in a transaction have different levels of access to information. When parties implement standard labeling certification programs, both parties are assumed to have access to the same information regarding a building’s energy efficiency.

James Albis, executive director of the Connecticut Green Building Council, said one of the challenges the state faces is the cost of obtaining the labels. The evaluations and the registration process require money and time.

According to the 2015 Energy Performance of Buildings Directive Compliance Study, obtaining the EPC remains costly even in the European Union.

This label is never a guarantee that a building put up for sale or lease will have a successful transaction.

Lack of knowledge about the interpretation of the information on the labels is another hurdle. Given many aspects of energy efficiency in buildings are not visible, it is hard for buyers to see the connections between the energy-performance labels and their future economic benefits.

The other challenge, according to Albis, is the need to retrofit buildings to attain the required standards of the labels. He said, “The infrastructure is quite old and so its hard to attract LEED.”

Retrofitting by itself can be quite expensive to a property owner. In most cases, it makes more sense to apply the labeling to new buildings.

Despite the challenges observed with energy efficiency labels, they remain important in reducing energy consumption of buildings and the associated emissions. They can also be instrumental in determining the rate and price of sales for property owners.

Join our LinkedIn group to discuss this article. You may also email the author directly using our contact form.