Tuesday, March 1, 2016

Green luxury goods? The economics of eco-labels in the Japanese housing market

•  The pricing of green labels is analysed using a large sample of condominium transactions in the Tokyo housing market.
•  A significant price premium for the green label is found during the study period (controlling for other characteristics).
•  Higher income households exhibit a higher willingness to pay for green features.

Using a unique transaction database of condominiums in the Tokyo metropolitan area and a hedonic analytical framework, we find that eco-labelled buildings command a small but significant premium on both the asking and transaction prices. This finding is consistent with results from other countries but in contrast to these studies, the present analysis also incorporates buyer characteristics which provide further information on the sources of demand for eco-labelled real estate. A separate estimation by subgroups reveals that the price premium is primarily driven by wealthier households that exhibit a higher willingness-to-pay for eco-labelled condominiums, both as a total amount and as a fraction of the total sales price. Less affluent households are also shown to pay higher prices for the eco label but the effect is less pronounced. The results indicate that capitalised utility bill savings are likely to account for a large proportion of the observed premium but the higher premium paid by affluent households suggests that more intangible benefits of living in a green building may also play a role.
An early study by Dian and Miranowski (1989)[4] showed that increasing energy efficiency increases housing prices. Banfi et al. (2005)[1] have published research findings indicating that rental housing tenants are prepared to pay up to 13% higher rent for buildings that have adopted energy-saving measures. Similarly, Fuerst et al (2013)[11] found a price effect of higher energy performance in the British housing market for a large sample of sales transactions in the 1995-2011 time period, indicating a 14% premium of the highest band of the Energy Performance Certificate (EPC) over the lowest band. They also find that this effect tends to be larger for terraced dwellings and flats compared to detached and semi-detached houses. Earlier, Brounen and Kok (2011)[2] had examined the relationship between EPC ratings and sale price for 31,993 residential sale prices in 2008-9 in the Netherlands and report significant premiums for more energy-efficient buildings. Although their dataset contains a large number of control variables, the adoption rate of EPCs in the Dutch housing market was relatively low at the time (7-25% depending on the year) which may limit their findings. Similarly, Zheng and Kahn (2008)[28] and Zheng, Kahn and Deng (2012)[29] find significant price premia for ’green’ properties in the Chinese housing market and a study by Deng, Li and Quigley (2012)[3] finds substantial economic returns to green buildings in Singapore. Kok and Kahn (2012)[16] as well as Hyland et al (2013)[13] arrive at similar conclusions for the Californian and the Irish housing market respectively.
The average asking price has a value of 45.49 million yen, the average value for the actual transaction price was approximately 1.5 million yen lower, at 43.91 million....

The baseline estimation (Model 1) reveals that the average asking price for a condominium with a green label (two or three stars out of three) is 6% higher compared to a similar condominium without a label. In other words, the developers of condominiums with superior environmental performance offered them at a marginally but significantly higher price. However, the actual achieved transaction prices are more relevant to our central research hypothesis about the existence of a green premium. The general transaction price variable indicates that transaction prices were on average 3.5% lower than asking prices in the observed period 2001-2011. Green-labelled properties transacted with another marginal discount of 0.9%, with the green transaction price being 4.3% less than the asking price for labelled properties. The total green premium actually observed in the residential sales market therefore reduces to 1.6% (6%3.5%0.9%). Although relatively small in magnitude, this price premium is statistically significant.
Tokyo green-life apartment building:  
A more detailed list of coefficient estimates is contained in Appendix 1 which reveals a number of additional insights into the pricing of green and non-green condominiums. In cases where a Housing Design Performance Evaluation Document (Part A) exists, condominium prices are marginally higher (0.6%) while the presence of a Housing Performance Construction Evaluation Document (Part B) entails a 0.5% premium. These evaluation document variables are important for isolating the ’pure’ effect of the green label effect from other types of quality evaluation of newly built properties. Next, similarly distinguishing buildings based on management costs, maintenance/renovation investments, etc., shows that such costs and transaction prices are positive related. Furthermore, the price was lower when the type of land ownership was ’general leasehold’ or considerably lower for ’fixed-term leasehold’. The price was 2.2% higher when the dwelling is a corner unit. The coefficients of all other control variables including the time-period dummy variables exhibited the expected signs.

Model 2 ... reports the estimation results using robust regression, an estimation technique which gives proportionally less weight to influential outliers, thereby reducing the potential bias that a small group of properties with extreme or unusual prices and other attributes may introduce to the results. However, the results are only slightly different to the baseline model with a 5.9% asking price premium and a 1.8% transaction price premium for greenlabelled properties.

Next, we examine the impact of buyer characteristics on the model (Models 3-6 ...). To this aim, we divide buyers’ incomes into quartiles and estimate the impact of all price determinants separately for each income quartile. As expected, green asking price premia (as a fraction of the total price) are found to progress with increasing incomes of buyers (from 4% to nearly 8%). Similarly,we find that the average price premium observed in recorded transaction prices (as opposed to asking prices) is mainly driven by households with above-average incomes.paid for green-labelled propertie
by Franz Fuerst 1 and Chihiro Shimizu 2, 1, 
1. University of Cambridge, Department of Land Economy, 19 Silver Street, Cambridge CB3 9EP, United Kingdom 
2. Institute of Real Estate Studies, National University of Singapore, 21 Heng Mui Keng Terrace, #04-02, Singapore 119613, Singapore; Fax: +65 6774 1003
Journal of the Japanese and International Economies
Volume 39; March, 2016; Available online January 15, 2016; Pages 108–122
Keywords: Green building; Japanese housing market; Hedonic models; Ecolabelling; Willingness to pay
A full September 5, 2014 version of this paper is currently available free of charge at http://www.csis.u-tokyo.ac.jp/dp/133.pdf

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