How Much More Valuable is an Energy Efficient Home?

How Much More Valuable is an Energy Efficient Home? About 9 Per cent, According to a New Study on Home Labeling.

A research study [.pdf] released in July by academics at UCLA and UC Berkeley has found that homes labeled as “green” (i.e., energy efficient houses) sell for a sizeable premium relative to comparable non-labeled homes. This large sample study – 1.6 million single-family homes sold in California between 2007 and 2012 – used a methodology that controlled for variables other than energy performance that influence prices. These variables included: home size; location; amenities like schools and transit; and, home vintage. In addition, the study took account of recent turmoil in the US real estate market with homes sold at distressed prices as a result of the global financial crisis of 2008.

The bottom line conclusion: the study found that energy-efficient labeled homes typically sold for nearly nine per cent more relative to non-labeled homes. The average selling price of a home in California was about $400,000 during the study’s timeframe, whereas green labeled homes commanded a price of almost $435,000.

In a previous blog, I warned that California may leapfrog Ontario and assume a leadership position on home energy rating.  No doubt, California policy makers will be factoring the information from this Berkeley study into their deliberations. Perhaps policy makers in the Ontario government should as well.

In my 2012 Annual Energy Conservation Progress Report [.pdf], I pointed out that the residential sector accounts for 21% of total energy use in the province, and of this 21% consumption by Ontario’s housing stock: 62% is natural gas, 29% is electricity, 2% is heating oil and 6% is other fuels. In my energy report and in a previous blog, I questioned why the government has not acted on an existing statutory authority to protect consumers. Home energy labels create transparency in the property market because energy miser homes sell for more than homes which are energy hogs – as should be the case – and this can lead to a virtuous circle that fosters energy efficiency in the residential sector.

Currently in Ontario, no information that affords a comparative assessment of properties on a standardized basis is available to home buyers. As a result, home energy literacy is low. Real estate agents make little use of the Multiple Listing Service to promote such literacy and assist home purchasers. Mandatory labeling of houses at time of sale would overcome the asymmetry of knowledge that exists between the buyer and seller of a home.

Labeling would also confirm that the construction of efficient new or retrofitting of existing houses increases home asset values. In other words, it raises home equity. Labeling would also provide feedback to sellers and create an impetus to improve their home’s energy efficiency. Home sellers would realize that they have skin in the game. With a 9 per cent premium on efficient homes – and an average home resale price in Ontario of $370,000 – that’s a lot of money sellers are leaving on the table by not upgrading their home’s efficiency.

The residential marketplace is beginning (as the commercial property market has already done) to identify a value proposition for improving the energy efficiency of homes.  Home energy labels provide a market signal to encourage investment in building stock efficiency.