What is the Value of ‘Green’?

by AppraisersBlogs · Published January 24, 2013 · Updated December 12, 2023

An academic study released last year found that homes with green labels provide a market premium of 9 percent compared to similar homes without the labels.

The study, “The Value of Green Labels in the California Housing Market,” examined how green and energy efficient features impacted the sale price of homes in California. It was published by Nils Kok, Maastricht University, Netherlands/University of California, Berkeley; and Matthew E. Kahn, University of California, Los Angeles.

The study also found:

The premium associated with green labels is highest in areas with hotter climate.
The premium is positively correlated to the environmental ideology of the area, as measured by the rate of registration of hybrid vehicles.

While the results are interesting, appraisers should take these findings with a grain of salt.

The data set used in the study, although vast, did not perform a direct comparison of similar homes with and without green labels. The authors’ use of hedonic regression was an understandable method to derive contributory value in this case, because there was such a large amount of data available. However, the study did not utilize paired-sales to derive the 9 percent value premium.

This 9 percent is more than the average additional cost to build green according to the McGraw Hill Green Smart Market Report, published in 2011, which estimates only 5 to 7 percent additional costs to build green. The cost approach is a good test of reasonableness; because the study reports numbers over costs, it could be cause for concern and lack reliability.

When appraising a green home, the appraiser evaluates supply and demand and competition in general, as well as specifically for green homes. Is the subject home the only green home in the area? Are typical purchasers in that market area knowledgeable about green building? Are they willing to pay more for a green home? Or, given the choice between a green home and a non-green home, are they more willing or likely to buy a green home?

What this study demonstrates is that appraisers must take green valuation seriously because it will likely continue to gain momentum. Advancements in energy efficiency offer appraisers many new opportunities, and by understanding the many aspects of green valuation, they can set themselves apart from the competition.

Overall, the study – and coverage surrounding it – represents positive steps toward defining green value. As they would when providing any credible, reliable opinion of value, appraisers must remain aware of new trends and developments and continue to perform to the high standards expected of the profession.

~ Source Appraisal Institute (AI)