Fernández, A., Haffner, M., & Elsinga, M. (2022, August-September). Understanding the impact of energy efficiency on the housing costs to income ratio: an Instrumental Variable approach. In European Network for Housing Research (ENHR) Conference 2022. Barcelona, Spain.

Decarbonising the built environment is a critical element of the UK’s strategy to achieve net-zero emissions by 2050. Enhanced standards in new homes and subsidies for retrofitting second-hand homes are among the measures put in place to encourage energy efficiency improvements across the housing stock. Over the past decade, a growing body of literature has focused on using hedonic pricing to determine the existence of real estate premiums linked to energy efficient homes.

More recently, as part of the credibility revolution in economics, instrumental variable (IV) approaches have served to improve hedonic pricing. This paper draws from the literature on hedonic pricing but focuses on the housing costs to income ratio, a usual measure of housing affordability. As housing takes up an increasingly large proportion of households’ income, the transition toward a low-emission built environment has the potential to exacerbate affordability issues. In this context, this question arises: “How does energy efficiency impact housing affordability?”

To understand the effect of energy efficiency on affordability, we apply an IV (2 stage least squares) approach using building age as the instrumental variable. Unlike traditional hedonic pricing approaches, which use repeated sales data; this paper relies on the English Housing Survey (EHS), a cross-section of households personal and dwelling characteristics. The results show that, while OLS estimates are biased downwards due to simultaneity with the rent proportion of the ratio; a linear IV model finds an 8 to 10% increase in housing costs to income ratio for energy efficient units among renters. The results for homeowners, while not as statistically significant, point in the opposite direction, to a decrease in mortgages with higher energy efficiency. An increase in the rent-to-income ratio has policy implications, as subsidies to landlords to improve energy efficiency can also lead to an increase in government spending on housing benefit.