A Quantitative Study- The Capitalization of Energy Efficiency on Housing Prices

Abstract: Various studies in the EU have examined the effect of Energy Performance Certificates (EPCs) on the real estate market, examining market values, rental values, and yields. However, there is dissent on the effect of EPC. The study tests for the impact of EPC alone and in relation to socioeconomic attributes on transaction prices of residential properties in Stockholm, Sweden. The thesis analyzes real transaction data of the 26 municipalities of the Stockholm region. Firstly, the research aims to determine if the energy efficiency capitalizes on residential property prices and if and to what extent the capitalization varies within the municipalities of Stockholm. Lastly, the study examines how income and education influence the prices of energy-efficient properties. The applied approaches follow the hedonic pricing method, namely, the OLS (Ordinary Least Squares) and spatial models. After analyzing more than 40,000 observations, the regression results indicate that high energy efficiency is reflected in the price premium of apartments and dwellings. For example, energy-efficient apartments with an EPC grade of A, B, or C achieve a price premium of around 0.99% compared to apartments with lower EPC grades between D-G. The results indicate a more considerable price premium of approximately 3.33% for energy-efficient dwellings. Another result of the study is that the capitalization of energy efficiency varies strongly between the municipalities of Stockholm. For apartments, the data implies substantial differences ranging from -15% in Danderyd to +14.2% in Upplands-Bro. The “local” premium for energy-efficiency dwellings ranges from 3% in Stockholm municipality to 9.5% in Norrtälje. Even though the results were significant, they need to be interpreted with caution as the sample size of some municipalities was relatively small. The last aspect of the study incorporates the issue of socioeconomic variables, income, and education level. The initial hypothesis was that high income and education would be correlated with higher energy performance certificate (EPC) grades. However, the results suggest a negative correlation between income or education level with EPC grade. These results imply that market participants with higher income and education are less likely to seek a higher EPC grade. The reason could be that these high-income households have a lower sensitivity to rising energy prices and fewer issues to afford the old but prestigious housing stock.