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Modelling energy retrofit investments in the UK housing market: A microeconomic approach

Hassan Adan (Department of Land Economy, University of Cambridge, Cambridge, UK)
Franz Fuerst (Department of Land Economy, University of Cambridge, Cambridge, UK)

Smart and Sustainable Built Environment

ISSN: 2046-6099

Article publication date: 16 November 2015

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Abstract

Purpose

Improving the energy efficiency of the existing residential building stock has been identified as a key policy aim in many countries. The purpose of this paper is to review the extant literature on investment decisions in domestic energy efficiency and presents a model that is both grounded in microeconomic theory and empirically tractable.

Design/methodology/approach

This study develops a modified and extended version of an existing microeconomic model to embed the retrofit investment decision in a residential property market context, taking into account tenants’ willingness to pay and cost-reducing synergies. A simple empirical test of the link between energy efficiency measures and housing market dynamics is then conducted.

Findings

The empirical data analysis for England indicates that where house prices are low, energy efficiency measures tend to increase the value of a house more in relative terms compared to higher-priced regions. Second, where housing markets are tight, landlords and sellers will be successful even without investing in energy efficiency measures. Third, where wages and incomes are low, the potential gains from energy savings make up a larger proportion of those incomes compared to more affluent regions. This, in turn, acts as a further incentive for an energy retrofit. Finally, the UK government has been operating a subsidy scheme which allows all households below a certain income threshold to have certain energy efficiency measures carried out for free. In regions, where a larger proportion of households are eligible for these subsidies,the authors also expect a larger uptake.

Originality/value

While the financial metrics of retrofit measures are by now well understood, most of the existing studies tend to view these investments in isolation, not as part of a larger bundle of considerations by landlords and owners of how energy retrofits might influence a property’s rent, price and appreciation rate. In this paper, the authors argue that establishing this link is crucial for a better understanding of the retrofit investment decision.

Keywords

Acknowledgements

The authors are grateful to the Editor and two anonymous referees of this journal for valuable comments. Franz Fuerst acknowledges the continuous support of his research by the Cambridge University Land Society (CULS).

Citation

Adan, H. and Fuerst, F. (2015), "Modelling energy retrofit investments in the UK housing market: A microeconomic approach", Smart and Sustainable Built Environment, Vol. 4 No. 3, pp. 251-267. https://doi.org/10.1108/SASBE-03-2013-0016

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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