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The link between energy efficiency and higher property values

Energy efficiency ratings and houseprices infographicOn the 18th June we published research that, for the first time, confirmed a link between a home’s energy efficiency and its sale price in the UK. This means that in addition to lowering energy bills, improvements such as wall insulation, double glazing or efficient boilers can also help to achieve a higher resale value compared to similar properties which are less efficient.

Compared to dwellings rated Energy Performance Certificate (EPC) G, dwellings rated EPC F and E sold for approximately 6% more, dwellings rated D sold for 8% more and dwellings rated EPC band C for 10% and A/ B sold for 14% more than the worst-rated dwellings. When investigating the relationship between dwelling price appreciation and EPC rating, the evidence is less clear-cut but remains generally supportive of a positive association.

This is the first large-scale empirical study of the effect of energy labelling on property residential property prices in England. Our results are based on transactions involving more than 300,000 dwellings which sold at least twice, taking into account sale prices, dwelling attributes, detailed information on EPC ratings and a host of socio-economic area variables.

While we do not claim that an econometric study such as this one, can pinpoint the exact monetary value-added of energy efficiency in each case, we have endeavoured to be as meticulous as possible when building our statistical model. A crucial factor for the success of this study was the inclusion of the main determinants of house price. For example, modern properties might sell at a higher price regardless of their level of energy efficiency. There are certain property attributes that are important determinants of price: size, location and type of dwelling being the more obvious ones. Energy efficiency, although growing in importance, is currently only a secondary factor in most purchasing decisions.

Given that there is a negative relationship between a home’s age and EPC performance, we ensure that the complex interaction of age, size and type (detached, terraced etc.) on dwelling prices are carefully addressed by not only including these as explanatory variables but by measuring price on a square metre basis rather than the total price of a property.

Following the release of this study, a number of critical comments have doubted the existence of an energy efficiency price premium and claimed that homebuyers often do not even ask for the EPC information and that the EPC was not sufficiently accurate as it is essentially an estimate based on the assessor’s inspection visit rather than the result of an in-depth energy audit of the entire property.

Notwithstanding these critical points, there appears to be a consensus that the EPC is the main tool for providing information on the level of energy efficiency to prospective buyers. Furthermore, prospective buyers can usually obtain information on the type of heating system, loft and cavity wall insulation from the estate agents and/or sellers. The fact that EPCs give an indication of the energy efficiency grade of a property rather than show precisely what savings can be expected should not detract from the potential for house price savings.

A fair price for these energy-saving features will be achieved in most cases, i.e. energy savings are generally capitalised into house prices, even if some of the buyers are not well informed or do not even care about these features.

The regional variation in price premiums is another interesting point. The study attempted to control for as many variables as possible that explain difference in property prices. Some regions, such as the South East, can be influenced by other factors that have not been controlled for. A likely reason is that property prices are heavily influenced by location to commuter links, where the price impact of energy efficiency is masked by this effect. It does not imply there is no impact of energy efficiency, only that the model has not detected it. Hence, the price premiums are likely to vary according to factors such as climate and temperature, as well as householders’ income levels and the underlying market conditions.

Separate estimation of the house price effect of EPC ratings for each region reveals that the percentage premium commanded by properties with above-average EPC ratings is higher in regions where house price levels are low and vice versa. It is likely that this is due to the fact that broadly similar energy savings across regions had quite different relative effects on house prices.

By contrast, sale price premiums in the North East and North West of England may seem surprisingly high. However, there are a number of factors at play that may explain these figures. Firstly, upgrading to double-glazing, renewing the heating system, adding an extension or converting a loft invariably involve improving the energy efficiency of the dwelling. It was not possible in this work to completely separate out the value added by home improvements in general from energy efficiency improvements in particular. We intend to do this in follow-up work.

In summary, we find some support for an existing link between EPC ratings and property prices but this does not mean that this link is perfect in all regional markets. To be sure, every study, no matter how thorough and large-scale, has its limitations which we hope to have pointed out. Nor does our study support the claim that current energy efficiency levels are already at their optimum and that there is no need for further private and government initiatives aiming to increase the general energy efficiency levels of the British housing stock.

19 Responses to “The link between energy efficiency and higher property values”

  1. John Michael says:

    As a company director for New Move online estate agents the EPC is crucial to encourage house builders to improve the quality and efficiency of all new builds and extensions. With rising energy bills this is a must. So how does this effect/benefit estate agents, buyers and sellers. If you were to have identical houses marketed at the same price and on was more efficient than the other, the buyer would purchase the more energy efficient property. But do purchaser really look at the EPC report? The majority don’t.
    With the changes in the rental market from 2018 it will be illegal to let a property which has an EPC rating below E, so where does that leave historic listed building, can they never be rented out without being detrimental to the integrity of the original building. If this is the case will there come a time when house seller will no longer be allowed to sell their property that does not meet a minimum energy efficiency?

  2. Green Deal Team says:

    We welcome the discussion that this report has generated and felt it would be useful clarification to respond to some of the comments over the past few weeks in a separate blog which can be found on the link below.

  3. Forgive me that I cannot remember the source but there was some research on the secondary levers on hose purchases and they included broadband speed, mobile signal and I would suggest EPC/Bills going forward.

  4. This is an important initial step in trying to establish whether making a house more energy efficient can increase its value. I for one should greatly appreciate hearing from estate agents whether this has been their empirical experience.

  5. Dan White says:

    So you find two houses that you like, one has significantly lower bills and if you are off the gas grid has no oil dependency as it uses a heat pump; the other is on oil and poorly insulated. In any market there is surely a premium to be claimed!

    • Hi Dan,
      I totally agree that there is a premium to the more energy efficient house as you describe it.

      Consider this; a home that has had all the extra work to make it more energy efficient is likely to have been maintained and decorated to a more presentable standard – the owners are potentially more house proud or have the resources to invest in their home. The question that we are asking is how much of the valuation premium comes from the EPC rating and how much comes from the way the home is presented for sale?

      Homes where EPC ratings have improved (the study did a comparison over two sale events) suggest that it is the EPC rating that has caused all the change in value – we are simply suggesting that there might be more to it.

      Also you are assuming that home buyers are rational – people fall in love with homes for a myriad of reasons and the lower energy bills might be one (depending on the type of person), so are things as insignificant as the colour of the front door, how tidy it is inside, etc. Just how important is the EPC rating in all this – we think possibly not as important as Dr Franz is making it out to be, that’s all.

      • Dr Franz Fuerst says:

        This is a fair comment. However, we do acknowledge both in the report and the blog that it was not possible to include all the objective and subjective factors that may have had an impact on the transaction price of a property such as quality and appeal of the facade, interior layout, style and level of decoration etc. Nevertheless, we think that our results are still valid by and large despite this important limitation. What makes us confident about our results is the fact that we can get a pretty good idea about the magnitude of all these unobserved factors taken together by comparing the ‘hypothetical’ price that comes out of our statistical model to the actual price that was recorded by the Land Registry. Hence, if more energy-efficient homes were indeed generally better looked after and/or had several other features not captured by our model e.g. better kitchens or better bathrooms, this should produce a larger model error for homes with better EPC ratings but we did not detect such a problem.

    • Dr Franz Fuerst says:

      Thank you for your comment. It would indeed be very surprising if buyers did not take these important energy-related features into account when making an offer on a property. That said, we would still maintain our caveat that it is impossible to separate out the ‘pure’ value of energy efficiency. For example, a high-spec triple-glazed window may also have other desirable features such as additional security features, better looks etc. Having a programmable digital thermostat may also help to create a positive impression of a property because it may signal that the property is maintained up to the latest standard. But even if we had at our disposal all these minute details for each property in our large database (which we don’t), it would still be a matter of debate whether these indirect effects should also be included in the energy efficiency premium.

  6. It is fascinating to read Ron Kennor’s comments.

    While the statistical analysis might seem conclusive, no statistician can or should ever ignore qualitative information which will frame the numbers correctly; estate agents are refuting these findings and no one will be closer to the actual situation than they are.

    Perhaps the author to this article could suggest other plausible reasons for the results that he has found (other that EPC rating directly resulting in house price increases) – we have suggested one which immediately troubled us; is there more to this?

    We have written a fuller article on our thoughts which might help those interested or need more information:

    • Dr Franz Fuerst says:

      Many thanks for your comment and the full article posted on your website which I have read with great interest. Whilst we cannot rule out that the ‘house-proud’ factor plays a role in the premiums that we found, it is very difficult to test this hypothesis. A step in this direction would be to add a maintenance rating to our set of price determinants but even then it will difficult to pinpoint the exact contribution of energy-related features to the price of a property. On the other hand, it seems unlikely that the significant premiums that we found for homes with good EPCs are solely due to better maintenance. After all, there are many properties that are well looked after but do not score very highly on the EPC, for example period properties that would require substantial refurbishment in order to achieve a high EPC rating.

  7. Ron Kennor says:

    There are lies, damn lies , and statistics.

    I am both an energy assessor (DEA) and a licenced estate agent and in our market I can categorically state that purchasers have absolutely no interest in the EPC rating and it has no effect on the value.
    The fact that it is valid for 10 years and is being re-used merely as a necessary document for house sale, irrespective of its content which doesn’t mention any recent improvements, further damages its credibility. This is government spin at its finest.

    • Dr Franz Fuerst says:

      I am primarily an academic researcher so am not in a position to comment on the use (or misuse) of EPCs in practice but find it hard to believe that buyers should have absolutely no interest in the energy bills they are facing. As energy costs can be almost as high as their mortgage payments in an environment of low interest rates and rising energy prices, they would ignore these considerable monthly outgoings at their peril. Granted, the relationship between the EPC and actual energy savings is a complicated one and a good EPC rating may be a relatively low priority for the average buyer but this does not mean that there is no relationship at all. Also, the EPC is probably just one among several clues that buyers can use to get an idea of the level of energy efficiency of a property. And even if some buyers lack the know-how or simply do not care at all about these features, they are likely to be outbid by those who have done their due diligence.

  8. The data is nowhere near as conclusive as you seem to declare.
    The document doesn’t include the South East or East Anglia for a start.

    The data is being used to adbance the reasons or enhance Green Deal but the data was taken up to Mrach 2013.

    As you statelater in the NE & NW the figures for improvement and energy efficiency have not been seperated out so have no merit in the initial statement and conclusions.

    so NE7 NW can be excluded. You have not included figures (according to DECC) for the South East and East Anglia. So actually how accurate i=s the conclusion?

    Add to this the large number of properties in negative equity as published last week and the whole research is flawed.

    It is worth noting that very few people would enteratin the cost of energy efficiency if they were looking to move in the short term.

    • Dr Franz Fuerst says:

      In fact, our study covers all regions of England, including the South East and East. The reason that these two regions are not displayed in the DECC map is simply that their results are not statistically significant which is why they were coloured grey in the map and the values are not reported as this would be misleading. However, our results are significant for England as a whole and for most regions so we would maintain that our conclusions are justified.

  9. Is there a correlation between the EPC rating and the level of maintenance and/or standard of decoration in a home?

    While it would be impossible for this study to determine this retrospectively, it doesn’t seem that far fetched or highly probably. A home owner that cares enough to ensure that his home is well presented before a sale is more likely to have investigated and carried out energy saving improvements. The more ‘house proud’ you are the more likely you are to do these things.

    Has this study simply found a link between the a well presented home (by measuring a function of this; the higher EPC rating) and the home achieving a higher sales price – a fact long know to estate agents and savvy home owners, I believe?

  10. Roger Parker says:

    Oh dear – research trying to find a nuance, a marginal improvement in house price in order to spin it as a benefit of having a higher grade of EPC; when in fact any EPC upgrade, when set against the order of magnitude of one house-retrofit a minute until 2050 to acheive an 80% reduction in CO2 emissions (based on 1990 figures), is but a miniscule improvement and reduction in CO2; and worse still, deflects attention and effort from what is REALLY required to tackle this problem. We are fiddling while Rome burns!

    Commercial Energy Assessor

    • Dr Franz Fuerst says:

      It is clear that the rate of energy efficiency upgrades in the UK housing stock needs to rise dramatically if we are to meet the ambitious 2050 emission targets. That said, pricing is vital for achieving these outcomes and there would be very little hope of achieving any significant reductions at all if energy efficiency were of no value to house buyers. An estimated 14% price difference between the lowest and highest rated properties is not trivial and neither are the several tonnes of saved greenhouse gas emissions that a highly energy-efficient property can save in every year of its operation.

  11. derekb says:

    I think your headline and 1st paragra[h over sells the link you have found.

    • Dr Franz Fuerst says:

      Thank you for your comment. The empirical evidence and the various robustness checks that we have conducted lead us to believe that there is indeed a significant link between energy efficiency and house price so I do not think that the headline and text are overstating what we have found. Of course, there are a number of important limitations and qualifications and we would be remiss if we did not point these out. However, we have no reason to believe that any of them are so fundamental that they would render our findings invalid.

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