What Drives the Premium for Energy-Efficient Apartments – Green Awareness or Purchasing Power?

Abstract

We analyze whether lower rents for energy-inefficient apartments reflect tenants’ willingness to pay due to a higher green awareness, purchasing power, or energy consumption costs. Based on a German rental apartment dataset from Q1 2007 to Q1 2019, we use interaction terms for socioeconomic characteristics in a hedonic regression model. We find that rents are lower for apartments with higher energy consumption, even in neighborhoods with lower levels of green awareness. This relationship is stronger in neighborhoods with higher purchasing power, such that communities with low levels of green awareness and high purchasing power show the steepest negative slope for increasing energy consumption (-8.6% from the highest to lowest rating). Thus, the rent-decreasing effect of purchasing power is higher than that of green awareness. Splitting the entire period into smaller windows, we find that the interaction effect of green awareness has emerged in the most recent years (2017-2019). This may be driven by changes in regulation, which have made it easier for tenants to assess the energy consumption before they rent, or by a general increase in green awareness over this period.

Keywords: energy efficiency, energy performance certificates, price discrimination, green housing

JEL Classification: D49, D82, Q43, Q48, Q51, R31