The Increasing Value of Green for Residential Real Estate

Abstract

Research has documented a premium for housing with green amenities, on average, over sample periods. Given the increasing efficiency of green features and growing awareness of the environmental concerns in society, we posit that the relation between green amenities and transaction prices is not stationary. We find that premiums associated with green features are growing through time for residential real estate. We explain that this could be driven by a variety of factors. Our results suggest that appraisers should be careful not to make adjustments based on outdated ''rules of thumb'' pertaining to green characteristics. Environmental consciousness has grown over time. Harvard's Center for Green Buildings and Cities finds that support for green buildings is gaining traction. 1 Sanchez, Brown, Webber, and Homan (2008) document substantial savings associated with energy efficiency initiatives. Research indicates that commercial properties with green features are associated with higher rents, as well as higher transaction prices. Das and Wiley (2013) show that the green premiums for commercial properties change with changing market conditions. It is reasonable to expect that premiums for residential properties may also change with changing market conditions. Green premiums for residential properties have been documented. Aroul and Hansz (2012) report a premium associated with homes with green amenities. Dastrup, Zivin, Costa, and Kahn (2012) find that premiums are paid for homes that have solar panels. These residential studies report the association between green features and transaction prices, on average, over specific time periods. However, evidence is lacking regarding how green premiums might change through time for residential real estate. In this paper, we extend the literature by examining the temporal variations in green premiums for residential real estate over an eight-year period. There has been increasing concerns regarding the environment, resulting in increasing consumer demand for more environmentally friendlier options. 2 Furthermore, many individuals have started to focus on the environmental impact of their homes. Also, due to an increased awareness of the economic benefits as well as non-financial benefits of energy efficiency, green features have become a more prominent aspect in home purchase decisions. Therefore, we posit that the market's capitalization of benefits stemming from green features is evolving and is not constant over a long time period. Thus, in this paper we examine whether