Does voluntary disclosure create a green lemon problem? Energy-efficiency ratings and house prices

Abstract

This paper seeks to elucidate whether high levels of non-disclosure lead to adverse market outcomes in the form of the well-known lemons problem. It also empirically tests whether energy-efficiency ratings (EERs) are reflected in both housing sales prices and rents in the Australian Capital Territory, the only Australian housing market with mandatory ratings for all dwellings at point of sale or lease. Using a comprehensive dataset of sale and lease transactions during the period 2011–2016, a hedonic framework is applied. The analysis confirms that both the reported energy-efficiency levels and other sustainability-related characteristics that are not part of the formal rating assessment influence the pricing of both sales and rental transactions. Characteristics such as heating and cooling systems and the presence of solar power generators are significantly reflected in rents and sales prices, as tenants and buyers are likely to estimate their expected utility costs based on the EER. It is also shown that the option of leaving the EER of a rental property unreported presents a moral hazard for landlords of sub-standard properties, in that the likelihood of EER disclosure increases in line with the number of energy-efficient features of a property as revealed in the marketing material. The analysis also reveals that socio-economically disadvantaged areas suffer from disproportionately higher levels of EER non-disclosure, potentially constituting a ‘double disadvantage’ of non-disclosure and low–energy efficiency dwelling stock. From a market and asset-pricing perspective, it thus seems preferable to extend the requirement to obtain and present a valid EER to the rental market.