Housing Market Fundamentals, Housing Quality and Energy Consumption: Evidence from Germany.

Author:Claudy, Marius

    Residential housing plays a vital role in meeting climate change and C[O.sub.2]-mitigation targets. According to OECD-data, residential energy demand accounts for 25-40% of final energy needs in developed countries. The lion share of residential energy demand stems from space-heating and cooling. For example, in the US this accounts for about half of all residential energy demand, while in Europe two thirds of residential energy demand results from heating and cooling (OECD, 2003). On an aggregate level, factors like income-levels, energy prices and population composition have been shown to explain spatial differences in energy consumption (for an overview, see: Haas and Schipper, 1998; Nelson, 1975). Yet, observed regional differences in heating energy demand are often substantial (see Figure 1 for the German case), and are unlikely to be explained by varying consumption patterns alone.

    Other studies have thus investigated peoples' motives to invest in energy efficiency measures and new heating-technologies. Generally, research suggests that energy prices, investment costs and income levels all influence individuals' likelihood to adopt energy efficient technologies (e.g., Nesbakken, 2001, 1999; Vaage, 2000; Nair et al., 2010; Long, 1993; Cameron, 1985; Brechling and Smith, 1994; Sutherland, 1991; Alberini et al., 2013). Further, socio-economic factors like family size, age, or levels of education have been found to correlate with the adoption of energy efficiency measures (Jeong et al., 2011; Nair et al., 2010). However, as pointed out by several authors, the understanding of the motives and determinants of energy efficiency investments still appears inconsistent and incomplete (Eichholtz et al., 2013; Eichholtz et al., 2010; Schleich and Gruber, 2008; Nair et al., 2010; Mills and Schleich, 2012).

    One factor that has been widely neglected in the literature relates to how regional housing market conditions influence people's decision to invest in housing quality, and how this affects energy consumption. For example, in the context of green office space investments Kok et al. (2012, p. 562) concluded that "the diffusion [of green office space] has been more rapid in metropolitan areas with higher incomes, and in those with sound property market fundamentals (for example, lower vacancy rates and higher property values)." Yet, little is understood about how regional market fundamentals influence investment in residential housing quality. Because properties are not only consumer goods, but also capital assets, it is reasonable to assume that individuals optimize their investment decision in regard to expected rental income and anticipated changes in sales prices (Dipasquale and Wheaton, 1992; Leung, 2004). More importantly, these investment decisions are likely to correspond with certain levels in housing quality, which in turn influences energy consumption. In other words, in high-risk markets, or markets with low growth opportunities, the average level of investment should be lower than in regions where investors are faced with low default risks and promising growth opportunities (Capozza and Seguin, 1996; Capozza and Helsley, 1990). For example, in markets with high rents investors are more likely to invest in higher quality housing attributes like building materials, windows or insulation, which result, intentionally or unintentionally, in higher levels of energy-efficiency. While this view is well established in real estate and urban economics, it has only recently found its way into the empirical literature around energy efficiency, which can partially be explained by a lack of adequate data (Eichholtz et al., 2010).

    The present study addresses this paucity, and aims to contribute towards a better understanding of the relationship between housing market fundamentals, housing quality investments, and energy consumption. To this aim, we estimate the influence of regional market fundamentals on investors' decisions to produce a certain level of housing quality. In a second step, regional levels of energy consumption are modeled as a function of housing quality, controlling for key variables like average dwelling size, age and occupier characteristics. By focusing solely on apartment

    buildings in Germany, we concentrate on dwellings that pre-dominantly constitute capital assets; almost 80% of Germany's apartment housing stock is for rent. The study utilizes unique aggregated energy billing data from approximately 300,000 apartment houses in Germany. In absence of suitable micro-level data, we can only approximate housing quality by overall development costs. Further, we are limited to cross-sectional data. Nevertheless, our results provide first evidence that regional market fundamentals significantly influence regional levels of energy consumption.

    The remainder of this study is structured as follows. In the following section we provide a brief motivation for this research, and discuss the relationship between regional housing market variables, housing quality investments, and energy consumption. Next, we discuss the empirical approach as well as the underlying data on regional space-heating energy consumption and real estate investments. In the final sections we present our empirical findings, and discuss implications for energy research. We conclude by outlining avenues for further research.


    There are several potential sources for differences in space heating energy consumption across regions. The most obvious one is of climatic nature (Sailor and Munoz, 1997; Jacobsen and Kotchen, 2013; Koirala et al., 2013). The level of energy consumption also depends on the given quality of the regional housing stock, like the average age of dwellings, floor-space or level of refurbishment (Leth-Petersen and Togeby, 2001; Costa and Kahn, 2011; Chong, 2012). Another potential source of regional variation in heat energy consumption stems from socio-economic factors like occupants' age, income or average household size (Brounen and Kok, 2010; Meier and Rehdanz, 2010; Borenstein, 2013). Other studies have investigated households' individual motivation to invest in housing quality, which can be improved mainly by higher capital inputs, like better thermal insulation, more efficient heating systems, or thermal glazed windows, which in turn reduces energy consumption (e.g., Brounen and Kok, 2010; Leth-Petersen and Togeby, 2001). Generally, studies arguing from a consumption-based perspective show that the level of housing quality produced by individual households depends, at given budget constraints, on capital costs and expected future energy cost savings (Quigley, 1984). The level of energy consumption is subsequently adjusted according to income and energy price changes.

    However, energy efficiency can also be seen as an investment, which will yield future returns that do not necessarily stem from future energy cost savings, but from increased rental income and/or sales prices (Fuerst and McAllister, 2011). The value of energy efficiency is, from a capital-asset perspective, determined in regional housing markets and the underlying fundamentals. The connection between energy efficiency and regional housing market fundamentals becomes apparent when one differentiates between different types of investors. For example, empirical evidence suggests significant differences in housing quality between owner-occupied and rental housing (e.g., Rehdanz, 2007). One key explanation is that landlords' return on energy-efficiency investments is determined by potential increases in rental income and/or future sales prices of the dwelling, and not by energy cost savings (Hyland et al., 2013; Fuerst et al., 2015; Kholodilin and Michelsen, 2014). In other words, the level of energy efficiency is subject to optimization according to anticipated future rental income, sales price and actual investment costs. Scholars have argued that in situations where landlords cannot pass on the cost of energy efficiency investments in form of higher rents or future sale price, one can expect an underinvestment in housing quality--a phenomenon is widely known in the literature as the landlord-tenant dilemma (Schleich and Gruber, 2008). Regional patterns in energy consumption in rental property, as for example observed in Germany, are thus likely to correspond with differences in regional housing market conditions. In the following, we discuss the various influences that are likely to enter investors' decisions in more detail.

    2.1 Determinants of Housing Quality Investments

    Little is known about how regional market fundamentals influence investors' decisions to choose a certain level of energy efficiency, or more generally housing quality. This is potentially due to some major constraints in the empirical approximation of housing quality. Housing quality can be captured very specifically, i.e. by characterizing the specific attributes of a building and its components. In the energy efficiency context, it would be straight forward to concentrate on the thermal attributes of windows, attic insulation or the efficiency of the heating system. However, empirical studies in this context are often prohibited as aggregate data on the thermal quality of the housing stock is not available in official statistics. Likewise, micro-data on energy efficiency, market conditions, as well as characteristics of buildings and occupants are difficult to obtain.

    However, a specific feature of housing is that the quality of its attributes is to a large extend conjoint (for an overview see: Yates and Mackay, 2006; Blakley and Ondrich, 1988). High quality facilities like a fitted kitchen or state-of-the-art bathroom are likely to correspond with a certain level of quality of other housing attributes like windows and insulation. For example, investors are unlikely to fit golden bath taps without...

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