How “Greenness” is Evaluated in the Housing Market

Green buildings are generally defined as having better environmental performance, which is attributed to the fact that they typically emit less CO2. The concept of green buildings has been drawing more attention in recent years because construction and operation of real estate account for a large share of total CO2 emissions, particularly in areas such as Tokyo, Japan.

Ongoing research by Yiro Yoshida, professor of business at Smeal, and coauthor Ayako Sugiura, of the Tokyo Association of Real Estate Appraisers, examines the impact that pricing has on the green building market in Tokyo. Their research is based on the notion that if green buildings are traded at sufficiently high prices, developers would be more likely to voluntarily construct buildings with better environmental performance. A wider adoption of such practices would then influence the consciousness of renters/home-buyers, eventually leading to a larger impact on the overall housing market. However, before this wave of influence takes place, the researchers argue that it is important to question whether or not “greenness” is priced in the market, and if so, how that price is determined.

The definition of green buildings varies by the evaluation system. In some systems it is defined merely by energy efficiency, but in others it is defined by a combination of sustainability factors. For example, many green labeling systems such as the Leadership in Energy and Environmental Design (LEED) program in the U.S. use comprehensive measures to determine the environmental quality of real estate, some of which are not directly linked to CO2 emission. Yoshida and Sugiura base their study on the Tokyo Green Building Program (TGBP) in Japan. Much like the LEED program, TGBP determines the environmental friendliness of a building based on:

• Reduction of thermal loads

• Use of renewable energy

• Use of energy saving equipment

• Use of eco-friendly materials

• Long-life design of the building

• Water circulation

• Planting

• Mitigation of the temperature within the metropolitan area (otherwise known as the heat-island phenomenon)

Beginning their research by examining condominium sales in Tokyo and the environmental evaluation system under the TGBP, the researchers look at how certain evaluations effect pricing differentials on green condominiums.

The researchers find that green condominiums are generally traded at a discount, however, depending on the itemized score they receive, those discounts can fluctuate. For example, buildings that have a long-life design and contribute to the mitigation of the heat-island phenomenon come with less of a discount than those buildings that use eco-friendly materials, circulate water, provide more green areas, and have energy saving features. Such findings naturally lead the researchers to question why such different effects occur according to each item on the TGBP evaluation system.

A leading explanation is based on maintenance costs incurred in the up-keep of green buildings.

“If a feature of a condominium incurs higher costs in maintenance and replacement of equipment,” the researchers write, “the owner rationally discounts the initial transaction price by subtracting the present value of future costs.”

The researchers suggest that a longer life should be associated with a higher sale price because an owner’s costs of maintenance and renovation are significantly lower. And in Japan, where condominiums have relatively short economic lives, a long-life design is especially effective.

Other factors such as the use of eco-friendly materials can increase an owner’s maintenance costs. The durability of eco-friendly materials can be less than that of standard materials. If buyers expect higher maintenance costs due to frequent replacements of more costly eco-friendly materials, they may discount the sales price.

Overall, findings show that green buildings may well be associated with price discounts rather than premiums. The value of green buildings critically depends on how they are defined, institutional settings, policy programs, and renter/home-buyer preferences. Therefore, a particular result for a certain property type in a jurisdiction or a country cannot be generalized without a condition. For example, the researchers cite that price premiums reported in previous studies are mainly based on energy efficient buildings. This suggests that more empirical studies for various property types in different areas are necessary in order to understand the overall value of green buildings.

The researchers also find that a strong variance exists in how items of “greenness” are determined relative to their evaluation. Findings indicate that while it is apparent that developers are capitalizing on the high cost of environmental-friendly technology, the positive effects of adopting green residential standards among renters, homebuyers, and policy-makers are limited. The researchers argue that in order to generate an autonomous diffusion of green buildings, much stronger policy measures are needed to surmount price discounts and even generate price premiums.