Rents as incentive for saving energy: an empirical analysis for Austria

1. Rents as incentive for saving energy: an empirical analysis for Austria Gunther Maier, Philipp Kaufmann, Andreas Oberhuber

2. Overview • Introduction: The need to save energy in the housing sector • The economics: landlords, tenants and investments in energy efficiency • The Austrian context: rent control and improvement funds • The empirical evidence: heating costs in hedonic rent equations • Summary

3. Introduction • About 1/3 of energy is used for buildings • In Austria, 28.1% used for heating and cooling of rooms • Kyoto • Austria agreed to reduce energy use in the building sector by 28.1% (relative to 1990) • Actual increase by 4.7% • Slow adjustment process • Long lifetime of buildings, slow rate of replacement • Buildings built today determine energy use for the next 20-30 years

4. Introduction • Reduction of energy consumption in buildings is urgently needed • How can this be achieved? • Regulations • Investment subsidies • Market incentives • How do market incentives work in the current structure?

5. Economics • Energy consumptions in buildings is determined by various actors • Energy provider: supplies energy in the requested form, paid by tenant • Landlord: rents the appartment to the tenant, decides about investments into the energy efficiency of the building (insulation, windows) • Tenant: pays rent to the landlord, decides about energy use (heating patterns, room temperatures, ventilation) • Government: sets and controls regulations, provides investment subsidies • Limited transparency of costs of heating/cooling

6. Economics • Price of housing: • P = rent + operation costs + cost of heating/cooling • Relevant price for the tenant: P • Relevant price for the landlord: rent • Relevant price for the energy provider: cost of heating/cooling • Tenant: • tradeoff between „rent“ and „cost of heating/cooling“ •  willing to pay a higher rent for an appartment with lower costs of heating/cooling

7. Economics •  incentive for landlord to invest in energy efficiency of the building: market incentive for investments in energy efficiency • Does this mechanism exist in Austria? • Empirical approach: • Estimation of a hedonic price equation: • r = f(Xa, Xb, Xl, Xc, h) • h is expected to have a significant negative coefficient (market incentive works in the right direction)

8. Austrian context • Austrian housing market is highly regulated (MRG – rental law) • Energy efficiency is not taken into account in these regulations • Most important regulated areas: • Protection against eviction • Limitations of rent levels and rent increases

9. Austrian context • Four types of rent: • limited (low standard, 1.54 €/m2/month) • Guideline rent (good quality, old buildings, legally set base rent + additions – subtractions) • Appropriate rent (newer buildings, good quality, improved apartments; appropriateness can be checked by court) • Unregulated rent (newer buildings, no public support; negotiable)

10. Austrian context • Rent increases: • In case of controlled rents, generally limited to CPI • Temporary rent increases • Under certain conditions • Must be approved by public authorities • Can be limited by court • For improvement investments • Funds cannot be used for other purposes • In case of free rents, generally according to contract

11. Empirical results • Does an economic incentive prevail in this regulated market? • Data • EU-SLIC 2006 and 2007 for Austria (Statistik Austria) • Household survey, 2 years, different numbers of variables • Only rented residential property • Only observations where rent is considered to be according to the market by the respondent • dependent variable: (log of) rent (per m2) net of heating costs • Important independent variable: heating costs (per m2)

12. Empirical results • Categories of control variables: • Fundamental appartment characteristics (size, size-squared, no.of rooms, availability of water, toilet, heating, garden, balcony, floor); 2006: 10; 2007: 28 variables • Fundamental house characteristics (age, type); 2006: 11; 2007: 12 variables • Locational characteristics (federal state, type of city, accessibility of bank, hospital, public park, shopping, etc., crime, noise); 2006: 15; 2007: 26 • Characteristics of contract (limited, length of contract); 2006: 1; 2007: 2

13. Empirical results

14. Summary and conclusions • Estimations do not yield the expected significant negative coefficient – positive and significant • Result is stable over years, specifications, and • Market incentive works against improvements in energy efficiency • Reason cannot be identified with this analysis • Strict rent regulation • Limited transparency (informational problem)