Estimating the implicit price of energy efficiency improvements in the residential housing market: A hedonic approach

Abstract

In this study a hedonic price model has been used to examine the impact which efficiency improvements have on housing values. Our study represents an improvement over a previous attempt to examine this issue in that the independent variable used in our analysis is designed to reflect variation in structural efficiency levels among sample homes, rather than variation in occupant lifestyles and preferences. In addition, a flexible functional form is used to prevent bias due to misspecification of the hedonic price equation. The study results reveal that efficiency improvements are capitalized into housing prices in Des Moines, Iowa. At the average efficiency level of homes in the sample, an efficiency improvement which results in a $1 decrease in the level of expenditures necessary to maintain the house at 65 ° F (in the average heating season) will increase the expected selling price of the house by $11.63. The premium obtained for an equivalent efficiency improvement will be greater than $11.63 in a relatively efficient home, and less than $11.63 in a relatively inefficient home. Without further information concerning the price expectations and discount rates utilized by Des Moines home buyers, and the average remaining life of fuels saving investments in the sample, it cannot be determined whether the housing market is pricing fuel savings efficiently. Regardless of whether or not the implicit price of fuel savings is the outcome of an efficient market, information on this implicit price facilitates the estimation of an average resale value of fuel saving investments. In addition, the results of this study refute the hypothesis that efficiency improving investments are not capitalized into housing prices.